Carrots, Cajoling, and Sticks: Credit card companies try to get paid

The background: card companies are panicking. It's been widely reported that as the credit crunch has evolved, credit card companies have grown ever more eager to have their customers pay down their balances. While there are several reasons behind their sense of urgency, two stand out. First, card issuers have all but lost their ability to "securitize" their loans. Until recently, banks bad been able to easily replenish money lent to customers by selling off those loans to investors. By contrast, they are now stuck holding those debts on their own books, eroding their balance sheets and causing themselves regulatory headaches. Second, as the economic downturn continues, card companies are finding that collecting repayment of their loans is growing increasingly difficult. Once borrowers cannot plausibly repay, most or all of their credit card debt will prove uncollectable. While this has always been a cost of doing business for credit card issuers, economic conditions are exploding these costs. Finally, It's also worth stressing that this second "more noncollectable debt" reason makes the first "can't securitize" reason that much more urgent. If I can sell off dodgy credit card debt in the securities markets, then repayment rates are no longer my company's problem. But when I all of a sudden have to keep it, weaker repayment becomes a huge problem.

This backdrop helps explain why many credit companies are pulling out all the stops to get debts owed to them paid down. Every day, new reports trickle in about various measures that card companies are taking to help them do this. Today I want to comment on the different methods they are using to make that happen.

Approach One: Offering Carrots. While they aren't eager to publicize this, card companies have long been willing to take less then they are owed from customers whom they believe may not pay them back. I have received reports of settlement offers as generous as thirty cents on the dollar. And media coverage from various sources confirms that as fear of widespread default increases, companies are more willing to offer and accept lesser amounts in settlement.

But lately, there's a new wrinkle. Credit card companies have begun offering cash to customers in return for their paying down credit card balances. Citibank actually began this movement a couple of years back, when they began offering credits for up to ten percent of the amount of debt that their customers decided to pay down. In recent months they have revived this program. As of this week, American Express has jointed the party, offering select customers a $300 American Express Gift Card if they pay off their balances between March 1 and May 1. And other companies appear to be following suit with this proactive, "carrot" approach to soliciting payments from customers. More details on these and similar offers are available at the useful CreditMatters blog here.

Approach Two: Begging and Pleading. Once upon a time, calls to customers seeking payments were reserved for those who were late or behind. No more! Creditmatters documents that now American Express is calling customers who are entirely current, but whom the bank fears may be at greater risk for repayment. Clearly, their representatives are encouraged to pressure the customers they reach to payments to be scheduled from their bank accounts while still on the phone. It seems that any worries about the bad PR American Express might engender by using such aggressive tactics are outweighed by their fears by what might happen if they are less aggressive. It will be interesting to see when and how other banks follow suit.

Approach Three: Threatening with Sticks. Credit card rate increases are now commonplace. Often, this is done as a matter of course, affecting all cardholders. But often such "rate-jacking" is targeted at those with outstanding debt to pay. The thinking here is generally twofold. First, we might as well get as much interest as possible from our customers before they have difficulty paying us back. Second, if our rates are higher, perhaps they will pay us off before other, less onerous debt.

Such measures aren't new...they've just been aggravated by the current financial environment. But card companies have launched some tactics that we haven't seen much of before. One is "balance chasing", in which the card company regularly cuts a credit limit to a level at or just above the remaining balance after each payment is made. (Yet another hat tip to Creditmatters for more on this). Card companies argue that the main reason for this is to limit their exposure. What's less often acknowledged by creditors is that by chasing the balance down, they effectively pressure cardholders to pay off that particular balance more quickly in order to keep their credit scores from deteriorating, due to very high reported "utilization" on that card.

Another tactic is the more aggressive interpretation of the "revisability" language contained within most cardmember agreements. Unlike other lenders, credit card companies have long asserted a right to change the terms on their products "at any time and for any reason". According to their most recent survey,
all ten of the largest card companies reserve this right. However, until recently, only subprime card companies would attempt to exercise this provision so as to change terms such as of existing promotional rate offers, repayment requirements, and "opt-out" provisions for customers who remained in full compliance with the agreement.

Now that may be changing. Consider the following example that's generating a lot of attention. Chase bank, now world's single largest issuer of credit cards after its recent Washington Mutual acquisition, has sent "change of terms" notices to many of its customers who have been carrying very low-rate promotional balances on their Chase cards. Those customers accepted so called "life of the balance" offers: pay a fee to Chase, and you can borrow money on your card at a low fixed rate--anywhere from 0% to 5%--until it is paid off. These notices state that as of January 2009, they will be charged a $10 per month "finance charge" regardless of their use of the card, and their minimum payments will increase from 2% to 5% of the balance remaining. The key point here is that Chase isn't even trying to represent this change of terms as being consistent with the original offer. Terms "fixed for the life of the balance" are in effect only "fixed" as long as Chase says they are. While class action lawsuits in response to this action are already pending against Chase, there have been rumors that Citibank has already decided to follow suit effective July 1 2009.

The bottom line: expect more of the same. There is every reason to believe that times will get even tougher for credit card issuers going forward. For that reason, we can expect more and more aggresive versions of these tactics: carrots, cajoling, and sticks. In this article I've tried simply to describe how these practices are evolving. My next piece on this subject will critically evaluate them, and also focus on appropriate ways of responding to them.