Debt Articles

Consumer Financial Protection Bureau: Know before you Owe
Authored by: http://www.consumerfinance.gov/

We developed a shorter, simpler credit card agreement that spells out the terms for the consumer. Note that this is not a model form, and use is not mandatory. Our prototype is shown here. We believe our approach will help consumers better understand their credit card agreements. Tell us what you think of it.

Review the sample agreement below. (You can also view a PDF copy.) The terms that are underlined in the agreement are defined in a separate list of definitions of credit card contract terms. Click any section of the agreement to learn more about it. Then leave your comments about the agreement or the definitions at the bottom of the page.

If you want to see what current agreements look like, check out our Credit Card Agreement Database.
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Debt Settlement: Fulfilling The Need for An Economic Middle Ground
Authored by: Bernard L. Weinstein, Ph.D. AND Terry L. Clower, Ph.D.
September 2009

For the past two years, the American economy has endured the most severe contraction since the Great Depression of the 1930s. Many bellwether companies have been forced into bankruptcy, home prices have fallen on average more than 20 percent, the equity markets remain 35 percent below their 2007 highs, and in excess of seven million workers have joined the ranks of the unemployed. As a consequence of what has come to be called the Great Recession of 2008-2010, household net worth has declined by more than 10 trillion dollars ($1.3 trillion in the first quarter of 2009 alone), home foreclosures have more than doubled, and personal bankruptcy filings have increased 100 percent over the past 18 months1 (see Figures 1, 2 and 3).

The recession has also impaired the ability of many Americans to service their consumer debt. At the end of 2008, average outstanding credit card debt for U.S. households stood at an all-time high of $10,679.2 Last year, 15 percent of American adults, or nearly 34 million people, were late making credit card payments while eight percent—18 million people—missed a payment entirely.

At this writing, there is some evidence that the economy may have hit bottom. The nearly $800 billion federal stimulus plan, coupled with the lowest interest rates in a century, appears to be having some positive impact—as indicated by the fact that the national economy contracted at an annual rate of only 1 percent in the second quarter of this year compared to 6.4 percent in the first quarter. Other economic measures, including home sales and the index of leading indicators, have turned positive in recent months. Still, the pace of economic recovery will be slow, and the unemployment rate is projected to exceed 10 percent by the end of 2009.
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Economic Factors and the Debt Management Industry
Authored by: ichard A. Briesch, PhD Associate Professor
Cox School of Business
Southern Methodist University
August 6, 2009

The current economic climate makes the need for debt management programs even more acute. More consumers are finding themselves in financial hardship due to high unemployment, low home equity rates, lack of access to bankruptcy protection, and the “credit crunch” so well documented in the press and by legislators. This economic climate implies that many consumers are one emergency away from financial hardship. There is no question that the multitude of people currently in financial distress need programs that reduce the principal of their debt to stave off bankruptcy (Manning 2009, Plunkett 2009).

Debt management programs (DMPs) come in several forms, but their basic structure is similar: they require some sort of consumer education if they are accredited by national trade associations (Keating 2008, USOBA 2008), consumer participation is voluntary (Hunt 2005, Plunkett 2009) and a plan is set up to make the consumer debt-free in two to five years. The key differences in the organizations are the mechanisms they use to finance the organization and to help consumers pay off their debt (Hunt 2005, Plunkett 2009).

In this paper, I refer to organizations that help consumers pay off their debt by reducing interest rates as consumer credit counseling services (CCCSs) and organizations that help consumers pay off their debt by reducing principal as Debt Settlement Programs (DSPs). The efficacy of these different approaches has been discussed by a variety of authors, but these discussions have lacked a clear and detailed consumer welfare analysis, which is provided in this research.

Secret History of the Credit Card

It's one of the most wonderful times of the year for the banking industry's most lucrative business: credit cards. In the coming weeks, millions of Americans will reach into their wallets and use plastic to buy an estimated $100 billion in holiday gifts. But at what cost? (more) »

In "Secret History of the Credit Card," FRONTLINE^® and The New York Times join forces to investigate an industry few Americans fully understand. In this one-hour report, correspondent Lowell Bergman uncovers the techniques used by the industry to earn record profits and get consumers to take on more debt.

"The almost magical convenience of plastic money is critical to our famously compulsive consumer economy," Bergman says. "With more than 641 million credit cards in circulation and accounting for an estimated $1.5 trillion of consumer spending, the U.S. economy has clearly gone plastic."

Millions of American families use their personal, general-purpose credit cards such as Visa, Mastercard, American Express and Discover to make ends meet; credit cards have been a discreet lifeline for families in financial straits.

But other consumers, like actor and author Ben Stein, use plastic purely for convenience. While it would appear that Stein -- who says he charges a small fortune every month on his credit cards -- is the ideal customer, in reality, he is what some in the industry call a "deadbeat." That's because he pays his balance in full every month.

The industry's most profitable customers, the ones being sought by creative marketing tactics, are the "revolvers:" the estimated 115 million Americans who carry monthly credit card debt.

Ed Yingling, incoming president of the American Bankers Association, tells FRONTLINE that revolvers are "the sweet spot" of the banking industry. This "sweet spot" continues to grow as the average credit card debt among American households has more than doubled over the past decade. Today, the average family owes roughly $8,000 on their credit cards. This debt has helped generate record profits for the credit card industry -- last year, more than $30 billion before taxes.

Some experts say the profitability of credit cards really began twenty-five years ago, when the banking industry successfully eliminated a critical restriction: the limit on the interest rate a lender can charge a borrower. Deregulation, coupled with a revolution in technology that enables the almost real-time tracking of personal financial information and the emergence of nationwide banking, has facilitated the widening availability of credit cards across the economic spectrum. But for some, the cost of credit is often far greater than it appears.

According to Harvard Law Professor Elizabeth Warren, the credit card companies are misleading consumers and making up their own rules. "These guys have figured out the best way to compete is to put a smiley face in your commercials, a low introductory rate, and hire a team of MBAs to lay traps in the fine print," Warren tells FRONTLINE.

Warren and other critics say that a growing share of the industry's revenues come from what they call deceptive tactics, such as "default" terms spelled out in the fine print of cardholder agreements -- the terms and conditions of which can be changed at any time for any reason with 15 days' notice.

Penalty fees and rates are sometimes triggered by just a single lapse -- a payment that arrives a couple of days or even hours late, a charge that exceeds the credit line by a few dollars, or a loan from another creditor which renders the cardholder "overextended" as defined by the nation's three all-powerful credit bureaus. This flurry of unexpected fees and rate hikes come just when consumers can least afford them.

"[Banks are] raising interest rates, adding new fees, making the due date for your payment a holiday or a Sunday on the hopes that maybe you'll trip up and get a payment in late," says Robert McKinley, founder and chairman of Cardweb.com and Ram Research, a payment card research firm. "It's become a very anti-consumer marketplace."

Banking Association spokesman Yingling defends industry practices. Because the credit card business is basically unsecured lending, he says, the risks associated with the business must be offset.

But that's of little consolation to consumers who may be in trouble. According to the Better Business Bureau, credit card and banking companies are the subject of a record numbers of complaints. "It's not an accident that the banking and credit card business generates more complaints nationally, across the country, than any other industry…Out of one thousand industries that we track, they are number one," says Pat Wallace, head of the San Francisco Bay Area Better Business Bureau. "There are irritated, unhappy, dissatisfied customers in this industry."

As Professor Warren sees it, the industry is operating without fear of penalty. "There's no regulator, and there's no customer who can bring this industry to heel," Warren says.

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