Loan Mods for Credit Cards Now at a Bank Near You


Banks don’t like it, but some are starting to cave in to consumer and advocate demands for credit card loan modifications. It’s happening quietly, but it’s happening.

Here’s the skinny. Credit card companies are weighing their options in a credit environment where credit card defaults have risen above 10%. Moody’s (Stock Quote: MCO) estimates that the national average charge off rate was 10.52% in July and is expected to hit 12% by mid-2010, the company reports.

Defaults lead card companies to “charge off” debts from card consumers – meaning it’s money the card company expects it will never get.

Consider Bank of America (Stock Quote: BAC). In June, the bank reported that its default rate had reached 13.8% - that was up from 12.5% in May. That’s almost 14% of all credit card loans that Bank of America will have to write off as a bad debt.

With its back to the proverbial wall, Bank of America now anticipates modifying 1.2 million credit cards in 2009 – that’s up from one million, according to The Washington Post (Stock Quote: WPO). The Post also reports that Chase (Stock Quote: JPM) is taking steps to ease its credit card modification program, which resulted in more than 600,000 consumers having their credit card debt restructured.

In a credit card modification deal, what can consumers expect? For starters, card customers who are in significant arrears may be forced to close their accounts to earn a lower interest rate. For example, if you owe $10,000 on a card with a 20% interest rate, card companies are amenable to lowering that rate to 5% or 6% - if you agree to give up the card and close the account. If you really push the issue, you might get an even lower rate offer – even 0% - if you can come up with a decent, upfront cash payment and, once again, agree to close your account.

If that sounds like a negotiation process, it is. Card companies aren’t really publicizing their loan modification programs, but they will engage you in a conversation if the card issuer feels like it can, for example, get 40 or 50 cents on the dollar. Ideally, card consumers should contact their card issuers and ask for a loan modification deal.

That said, some card companies are actually approaching customers who they feel are significantly behind on their credit card payments. Citicorp (Stock Quote: C) says it’s reaching out to consumers who aren’t even delinquent yet, but are showing signs that they could fall behind on their payments (minimum monthly payments are an example of red flags that card issuers use to peg a card customer as potentially becoming delinquent.)

Card issuers can take different paths with loan modification programs. Most will reduce onerous interest rates, and some – like Citi – will offer matching payment programs if you can pony up some cash up front.

If you do agree to a loan modification deal with your credit card carrier, expect to see your credit rating to take a temporary hit (especially if you give up your card). But if you stick to the deal and make your payments, over time that credit rating will once again move northward.

For card customers way behind on their payments, loan modifications can be a good deal. Just don’t wait for your card company to come to you – your chances should be better if you go to your card company.

—For a comprehensive credit report, visit the Credit Center.

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