Credit card use is expected to be 5 percent higher this year than last, according to the 2001 American Express Retail Index, which projects 57 percent of shoppers will use credit cards for holiday purchases this season. According to Cardweb.com, a payment-card information network, consumers will charge an estimated $121.4 billion to their major credit cards between Thanksgiving and Christmas–6.8 percent more than last year’s credit card charges.
The National Foundation for Credit Counseling’s 163 accredited agencies nationwide are bracing themselves for an above-average postholiday onslaught of consumers seeking aid in managing their debt–and they are crossing their fingers that it won’t be too late by then to help them. A small percentage of those who come to their offices are so deeply in debt by that point that they aren’t able to qualify for a debt-management plan and often end up filing for bankruptcy. NEWSWEEK’s Jennifer Barrett spoke with Bill Cullinan, CEO of the NFCC, a Silver Spring, Md., association that accredits agencies and certifies credit counselors, about how the credit counseling industry has exploded since the NFCC was founded 50 years ago–and how creditors are making it easier than ever to qualify for a credit card, but harder to pay it off.
NEWSWEEK: Statistics show Americans are charging more than ever. Have you seen an increase in customers this year seeking help in paying down their debt?
Bill Cullinan: We’d already seen a slight increase in volume this year before September 11 as the economy started to cool down a little. The overall increase appears to be modest; however, in the aftermath of September 11, certain areas have shown significant increases. For example, in areas where the travel and convention business is strong–they suffered a dramatic reduction in services. Our agency in Las Vegas told us that they almost doubled their volume year over year in the few weeks after September 11–25 percent of hotel and casino union employees lost their jobs in Las Vegas after the attacks. And in Florida, the offices have increased volume 35 to 40 percent over last year, in terms of overall contacts and consultations. In Chicago, volume is up 20 percent.
Why do you think consumer debt is at an all-time high?
It is a twofold issue. First, there is the larger societal issue of instant gratification fueled a great deal by advertising and peer pressure. That really puts people frequently in a position of feeling that, gee, they need this and that because someone else has it or they saw it advertised. It becomes more difficult for consumers, especially those with children and teenagers, to differentiate their needs from their wants. If you couple that with poor financial-planning skills and an inability or an unwillingness to make a family budget and stick to it, people can easily get to the point where they are in way over their heads. There is a societal issue of feeling pressure to get everything now because life is short–and that has been felt even more after September 11. At the same time, the credit industry has made credit more widely available and easily attainable than ever before. Even last week, between myself and my wife, we received seven credit card solicitations. There is just a nonstop onslaught of credit card solicitations.
What should consumers consider when deciding whether and where to seek help in managing their debt?
The danger of some of these plans where consumers pay high fees to have someone manage their debt is that it doesn’t necessarily help them get a better handle on their own spending habits or improve their financial skills. It’s just an easy way to reduce interest rates. We don’t think that’s what the focus of the industry should be. We feel people should take responsibility for their own financial affairs. If someone can manage on their own, we think they should–with help and counseling, of course. Only those with unfortunate life events or a lack of financial education or poor planning who have fallen too far into debt merit being included in the plans. They have to be willing to make sacrifices while on the plans because these plans are quite austere. But those who just see the commercials asking if they are tired of paying high interest rates–well, we don’t think that that is necessarily the right impetus to get on a debt-management plan.
The other danger is that the more this happens, the more consumers are put on debt-management plans, the more costly this becomes for creditors. They have their own budgets to live by, and one of their responses has been to reduce the level of support in concessions to the customer and to cut their “fair share” payments to credit counseling services. It is absolutely self defeating. The plans are only there for people who really need that level of help.
The National Foundation for Credit Counseling was actually founded by creditors in 1951. How has the relationship with creditors changed in recent years?
When the organization was started by creditors, they believed through their own experience that there were many consumers who got into debt and then had a hard time keeping up but wanted to meet their obligations. Perhaps they had lost a job or had a serious illness or just did a poor job of budgeting. Nonetheless, they were honest and wanted to resolve it. Creditors felt it would be appropriate to give a level of support to these consumers, and it was also good business because it probably increased the odds of them getting all or most of the principle balance back.
Years ago, the majority of large creditors would eliminate interest rates altogether and late charges or overcharge fees. In addition, the minimum monthly payment was reduced so consumers could afford to make regular payments. That model stuck together like that for at least 30 years or so. But a big change came in the early to mid-1990s, when there was a very significant increase in companies in the credit counseling field. Suddenly, there was an enormous increase in customer accounts that were being referred to [credit counseling] agencies. There was a much more significant increase in volume in the accounts of those consumers [having trouble paying off their balance] than in the number of regular accounts.
The response of the credit community was that, while they continued to want to support consumers who were in trouble, the volume was now too great to give these concession packages they were offering in the past. Most still eliminate late fees and reduce the interest rates, but very rarely will a creditor waive the interest altogether anymore.
How has the drop in concessions from creditors affected the NFCC and the consumer counseling industry in general?
In the NFCC, 70 percent of our funding comes from creditors in the form of “fair share” payments. That means creditors allow agencies to keep–or they reimburse them with–a portion of what the agencies have recovered for them. For example, if an agency is remitting $100 on behalf of a customer, then the creditor would give $10 [or less, depending on the arrangement] to the agency but credit the customer for a $100 payment on their account, then they would write off the $10 as an expense for which they get recognition and special tax credit considerations. We get the remainder of our budget from the United Way and other charities, from block grants and from state and private funding sources.
Up until about 10 years ago, the creditors used to give back about 15 percent of what we paid them in “fair share” payments [though credit the consumer for the full amount]. But starting in the early 1990s that percentage was reduced.
Do consumers end up paying for the drop in creditors’ “fair share” payments?
We were able to reduce some back-office costs by working with creditors on an almost exclusively electronic basis. We also get grants and money from various charities and other funding sources. For many years, we charged no fees to consumers for setting up plans and maintaining them (which includes receiving and dispersing funds to creditors). But today the level of support we receive from creditors has dropped enough that we have had to start charging fees in some offices. There is an upfront fee that is, on average across the country, about $16 for the initial consultation–to do a session and to set up a budget and a debt management plan as well. A number of our 163 offices still don’t charge anything at all. The range is nothing to $50 depending on the funding that agency receives. The second fee, if there is one, is used to cover maintenance of accounts each month. The average fee is $11 a month though, again, many agencies don’t charge anything. Consumers should be wary of those companies that charge high fees–some [though not NFCC members] charge as much as $75 a month.
Has the increase or addition of fees and the drop in creditors’ concessions made consumers less willing to sign up for help in managing their debt?
We find now that there are some consumers who are deeply in debt, but with the concessions not being as strong as in the past, some consumers feel that it’s not worth their while to enter into a debt-management plan. They may be faced with a few years of real austerity to meet the plan’s requirements. In these plans, every basic expense is accounted for, like housing and food and clothing, but there is not much left over. It’s not easy and people have to have a real desire to see it through and have the fiscal discipline. Unfortunately, some consumers now feel it isn’t worth it to make those sacrifices to get out of debt sooner. Then many consumers find that their accounts become more delinquent and then they have more difficulties with creditors trying to collect, they’re faced with lawsuits or collection agencies, and they often end up going bankrupt. In the fiscal year 2001, which ended in September, Americans set a new record for personal and small-business bankruptcies. The predictions for 2002 are that the number will be even higher. That is one of the unfortunate consequences of consumers feeling that they perhaps don’t have the alternatives that they had in the past.
In your experience, what does a consumer burdened by debt need to do in order to get on the right track over the long term? Do most organizations in the consumer credit counseling industry offer adequate services?
There are legitimate competitors out there. But consumers need to be wary because there are some credit counseling agencies that clearly are not doing the proper thing for the consumer, and they are not helping the creditors either. Many don’t put any real emphasis on education and don’t offer full-budget counseling services where they show and help consumers handle matters on their own. Many of these companies are putting far too many people on debt plans.
We have had several major creditors tell us that 70 percent to 80 percent of the consumers who approach some of these companies are put on plans. For us, it is one third that are put on debt-management plans. One third get full budget counseling then manage their finances on their own. And another one third are turned away for various reasons at that time. They are referred to other services, or we suggest that they contact an attorney (though we don’t make referrals to specific attorneys) because they waited too long–they are so deeply in debt that it doesn’t appear that they will find their way out. About 7 percent go to see a lawyer and often file for bankruptcy. Other people are turned down initially and referred to other agencies because they have addiction problems like gambling or alcoholism or they have a housing problem that must be taken care of first. Our affiliates are either part of a larger social service fabric in the community or are independent but know of other organizations, so they can refer people to the right organizations that can help them with particular difficulties.
