At the end of 2021, people in the United States had a total of $860 billion in credit card debt, with an average interest rate of 14.56% as of February 2022. Inflation has cost families an average of $296 more per month since last year. To keep up with rising spending, some people rely more on credit cards.
But credit cards often come with high interest rates, and that leaves many people on the “interest hamster wheel” that prevents them from getting out of debt, according to Eli Snyder, a credit counselor at Family Means, a Minnesota nonprofit that provides financial advice.
What many people don’t realize is that they can negotiate the interest rate they pay on their credit cards.
Many credit card issuers have what is called an internal hardship program, where borrowers can call their issuer and ask for temporary relief. Often, a bank will lower interest rates for a short period of time if the borrower faces serious financial hardship, such as job loss, injury, or divorce.
Another way is to talk to someone like Snyder. There are many nonprofit organizations that provide credit counseling, such as Family Means, who are all members of the National Foundation for Credit Counseling, a larger nonprofit that acts as an intermediary between banks and smaller counselors to renegotiate loan rates.
The NFCC is funded in part by banks such as Chase, Bank of America and Wells Fargo. Banks fund the NFCC because, as Snyder puts it, “it scratches everyone’s back. It helps the customer, it helps the creditor get paid back in full, unlike people who walk away and go bankrupt.” And big banks also get a tax write-off for participating in these programs, Snyder said.
“I’m sure it helps them on the PR front as well,” Snyder said. Banks are getting a boost in their reputation for helping people get out of debt, despite setting interest rates in the first place.
The NFCC negotiates lower interest rates with banks and shares these rates with non-profit organizations. The smaller affiliates can work directly with clients to get people access to those rates and get out of that hamster wheel, according to Snyder.
One of the primary ways credit advisors do this is by enrolling clients in a debt management program that accesses these discounted NFCC rates and consolidates the debt. Although all NFCC member organizations offer free credit counseling, access to lower interest rates through a debt management program costs a service fee.
At Family Means, the average debt for a client participating in the debt management program is $20,576, with an average of five credit cards. According to Snyder, 81% of customers are able to pay off their debt within the program’s five-year term. Many of Snyder’s customers come in with interest rates approaching 30%, and by having access to lower interest rates negotiated by the NFCC, customers pay their debt at an interest rate typically between 4% and 6%, Snyder said.
Some banks even drop to 1%, depending on the customer and the bank. The amount negotiated is subject to a system of ‘hardship levels’, meaning borrowers are entitled to the lowest rates in the worst situations.
Debt management programs nationwide must be completed in 60 months or less. If a customer participates in a debt management program, the credit card will be blocked from further spending, and once the debt is paid off, the account will be closed. However, Snyder said it will not affect the customer’s ability to open a credit card with the same company in the future. “It’s not that those creditors hate you for it. This is a program that they started through our national foundation to help people,” Snyder said.
But if a customer opens a credit card with the same company in the future, they can’t count on that 4% to 6% interest rate on the working card. The negotiated interest rate only applies if they participate in the debt management program, and closing a credit card can affect one’s credit score, although this isn’t always the case. But for people in debt-repayment programs, values tend to rise because debt management has improved, Snyder said.
As the pandemic began, people were paying off their debts and taking advantage of federal student loan suspensions, stimulus checks and lower interest rates. But now that credit card spending is recovering and interest rates are rising, debt management services are becoming more popular, “and with inflation going through the roof, a lot more people are turning to them,” Snyder said.
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