Immigrants' Experience With Credit Counseling Services & Industry Best .

Participants described both positive and negative Making referrals to social services, healthexperiences with credit counseling agencies. On theand legal services, including bankruptcypositive side, participants benefited from concessionsfiling;obtained from creditors to reduce finance charges;the ability to make one single payment to the credit Offering financial literacy courses to teachcounseling services rather than various payments tonon-English speaking consumers householdmultiple creditors; the modest setup fee chargedbudgeting, proper use of credit, and savingby some credit counselors to develop the DMP; andand investing for retirement, and chargingwhen available, the free financial literacy classes.low or no fees for the classes;Dissatisfaction with credit counseling services includedhigh initial payments; retainer of monthly payment for administrative costs; late payments to creditors whichDocumenting the fee structure used by theorganization;led to penalty fees; underestimation of time to payoff debt; fees for personal financial literacy or credit Offering in-person credit counseling; Conducting debt assessment sessions inmanagement courses; and materials not available inSpanish, the DMP contracts in dustrystakeholders, credit counseling agencies anticipate an increase in demand among non-English speakingPreparing an individualized, written actionplan for clients to follow;Hispanic immigrants. TRPI researchers have identifiedthe following exemplary practices that could be Having a DMP service agreement oremployed to enhance service delivery to Hispaniccontract in Spanish, which specifies mutualimmigrant consumers:obligations in the transaction; and Active membership in long-term established Compensating credit counselors based onnational associations of credit counseling,salary or hourly rate rather than commissionssuch as National Foundation for Creditbased on DMP volume.Counseling (NFCC) and the Association ofIndependent Consumer Credit CounselingThe following additional recommendations willAgencies (AICCCA);also play an important role in improving the creditcounseling services industry: Using bilingual, bicultural personnel whocan fully understand the Hispanic client and relate well to immigrant culture;To refine credit counseling services to satisfythe needs of non-English speaking Hispanicimmigrants, agencies should collect data Using bilingual personnel certified toby language, race and ethnicity to improveperform financial analysis of the client’sthe industry’s understanding of the needsbudget and provide proper advice;and problems of minority consumers.Implementingcustomersatisfaction To preserve or make inroads into thesurveys regularly to evaluate organizationalHispanic immigrant market, the industryperformance and effectiveness in servinghas to increase its credibility by policingclient needs;itself more effectively and enforcing uniformstandards more consistently.2

The credit counseling industry should Creditors should moderate aggressiveestablish partnerships with creditors, statemarketing practices by developing moregovernment and community organizationsstringent guidelines for issuing creditto expand its educational function in thecards.community through multi-lingual personalfinancial literacy classes. Government should consider setting limitson interest rates and late fees based on Creditors should offer more solutionsfair market rates of return. Interest ratesto high credit card debt, including debtof 19 to 24 percent charged to Hispanicsettlement plans to credit card holders.immigrants participating in the focus groupdiscussions are certainly suspect of being In addition to DMPs, the nonprofit creditpredatory, given the prime rate of 4.25counseling industry should diversify itspercent at the time of the interviews.activities by offering debt settlement plansand full bankruptcy services. Hispanic immigrants handicapped bylanguage need to be better informed on Government regulators and consumerhow to choose a credit counselor. At aprotection agencies need to be moreminimum, they should be warned aboutproactive in cracking down on abusiveusing credit counseling services thatpractices perpetrated against Hispanicoperate outside state boundaries, do notimmigrants, and help the industry to gethave offices in the state and do not offerrid of unscrupulous firms.full bilingual services.Since lenders receive substantial monetary High credit card debt can have negativebenefits from their credit card operations,individual and social impacts. Exceptthey should be more supportive offor bankruptcy, few of these negativenonprofit credit counselor’s efforts toconsequences have been documented dueprovide personal financial literacy classesto an increased business and governmentin immigrant communities.focus on the economic benefits of buyingon credit. More research in this area isneeded.3

Introduction and ObjectivesCredit card debt in the United States has continued toHispanic immigrant experiences with credit counselingincrease in recent years. By 2002, credit card debt hadservices, and identify industry best practices, the Tomásreached 764 billion and total debt (i.e., revolving plusRivera Policy Institute (TRPI) engaged in research2 tononrevolving debt)1 more than doubled from 789.1address the following questions:billion in 1990 to 1,725.7 billion in 2002 (U.S. CensusBureau 2003). What is the extent of credit card debtamong Hispanics nationwide?High levels of debt can make families financially morevulnerable to job losses, a drop in earnings, unexpected life events such as illness, disability and divorce, all ofWho among Hispanics is most likely to beat financial risk?which can trigger payment delinquencies, financialdistress and even bankruptcy. For families who own What is the Hispanic immigrant experiencetheir home, they run the risk of foreclosure. Ethnicin using counseling services to cope withand racial minorities are particularly at risk becausehigh credit card debt?of their lower earning capacity, lower wealth holdingsand relatively higher unemployment rates. What major barriers to using creditcounseling services do they face?Yet, there is little information on revolving or credit carddebt among ethnic minorities, especially Hispanics, and the problems they face in repaying their balancesWhat are some of the abuses perpetratedagainst this immigrant group?or finding culturally sensitive assistance to do it.There are approximately 35.2 million Hispanics in Are there industry programs or servicesthis country, and this market is projected to growthat can be used as exemplary models todramatically over the next 20 years (U.S. Censusaddress the credit counseling needs of thisBureau 2000). About 40 percent of this populationparticular clientele?is foreign-born; as many as 8.7 million entered theU.S. in the 1990s and close to 8 million do not speakThe collection of baseline data on credit cardEnglish well or at all (U.S. Census Bureau 2003, 2000).debt can inform policy makers on the scope of theThe foreign-born segment of this population lacksproblem, especially among renters and homeowners.familiarity with the U.S. financial system, may not beThe identification of abuses perpetrated againstaware of the credit counseling industry (Abram 1998),Hispanic immigrants and industry best practices couldand are likely to fall prey to marginal operators.lead to the drafting of reasonable standards toimprove industry performance and alert the HispanicTo fill the gap caused by the paucity of information oncommunity about fair and efficient credit counselingcredit card debt among Hispanics, and to learn aboutprograms that can assist them.1Total debt consists of revolving debt (i.e., credit cards such as Visa, MasterCard, Discovery, gasoline credit cards) plus nonrevolvingdebt, which includes home mortgages, equity credit lines and installment loans, such as auto loans.2Research was conducted between February 2004 and January 2005.4

Scope and MethodologyTo address the research questions, TRPI used primaryOther organizations (e.g., Better Business Bureau)and secondary data collected through alternativewere contacted to collect complaint data filed bymethodologies. To analyze the extent of credit cardHispanic immigrants, but the information on race ordebt among Hispanics nationwide, the Federalethnicity was unavailable. However, the DepartmentReserve Bank’s Survey of Consumer Finances (SCF)of Consumer Affairs of the County of Los Angeleswas used. Since SCF does not provide statistics forwas able to retrieve 12 complaints against creditHispanic immigrants at the national or state levelcounseling agencies filed by non-English speakingbecause the sample is too small, national statisticsHispanic immigrants from 2001-2003. Although somefor all Hispanics were used instead. These statisticsof these complaints were outdated, they did illustrateinclude U.S. and foreign-born Hispanics. The surveysome of the abuses perpetrated against the Spanish-data was downloaded from SCF’s website to developspeaking community.3pertinent information.To identify best practices in the industry, a list ofTwo focus group sessions were organized to find60 credit counseling organizations operating inout why some Hispanic immigrants with little or noCalifornia was developed and used to conduct a mailEnglish-speaking skills overextend their credit cardsurvey. The Internet and telephone directories werebalances, and to learn the consequences of suchused to identify existing organizations. To ensureaction. Emphasis was placed on the experiencesaccuracy, the list was validated by making telephoneand problems they encountered when dealing withcalls to these entities. It was found that many ofcredit counseling services and when enrolling in Debtthem had disappeared, moved or changed namesManagement Plans (DMPs). Due to limited resources,and telephone numbers. The list was limited toboth focus groups were conducted in Los Angeles andorganizations located in cities with more than 30consisted of Hispanic immigrants enrolled in DMPspercent Hispanic population, and included the fouroffered by several credit counseling organizations.largest California credit counseling organizations,One of the focus group sessions had seven participantsall members of the National Foundation for Credit(three men and four women) randomly selected fromCounseling (NFCC) and its 47 branches operating inthe client base of Consumer Credit Counseling Servicethe state. The list also included 13 small, independent,of Los Angeles. The other focus group session hadnonprofit services with no membership in NFCC.13 participants (seven men and six women) selectedfrom the Los Angeles Hispanic population at largeThe four largest credit counseling organizationsby random telephone dialing. This group used arepresenting 47 California branches responded to ourwide variety of credit counseling services. Hispanicinquiry. Of the 13 independent organizations, onlyimmigrants chosen for the study were from Mexico (16),one responded to the survey. In an effort to boostEl Salvador (3), and Colombia (1). They have residedthe survey response rate, several telephone calls werein the Los Angeles area for several years. Seven ofmade to principals and CEOs of independent servicesthem were homeowners. To the authors’ knowledge,that received questionnaires. Some of these executivesundocumented immigrants were not present in thesesounded extremely motivated over the phone butgroups. Each session was audiotaped for later reviewnever returned the survey nor would they agree toand translation.speak to the authors in person. Others did not return3This triennial survey relies on a random sample of 4,400 U.S. families. The term “family” is relatively similar to the household definitionof the U.S. Census Bureau. In the SCF, a family is defined as an economically dominant single individual or couple (either married orliving together) and all other persons in the household who are financially interdependent with the dominant individual or couple. TheSCF is sponsored by the Board of Governors of the Federal Reserve Bank. The data are collected by the National Opinion ResearchCenter of the University of Chicago (Aizcorbe, Kennickell, Moore 2003).5

our telephone calls. However, it was found that aboutcommunity with no English speaking skills. Personalthree of these independent operators appear tointerviews were subsequently conducted with CEO’scater exclusively to non-English speaking Hispanics.to discuss their programs, examine educational andReturned questionnaires were carefully reviewed toadministrative materials, and talk about issues ofidentify programs sensitive to the Hispanic immigrantconcern to the industry and the public.6

Credit Use Among Hispanic FamiliesThe increase in credit card debt has been attributedHigh credit card debt also has been traced to theto personal factors and changes that have taken placedisappearance of state usury laws.4 Interest rate capsin the banking industry. Job interruptions, sicknesshave become largely irrelevant with deregulation ofand injury in the family, lack of medical insurance, andthe banking industry and the fact that most creditdivorce are cited as the principal reasons for highercard issuers are based in states without usury laws.credit card debt (Sullivan, Warren and WestbrookThis change in the banking industry has made credit2000). The list has been expanded by adding highercard lending more profitable than any other typehousing costs and higher health insurance premiumsof lending (Federal Reserve Board 1997). Further,(Draut and Silva 2003). Compulsive buying, instantincreases in fees and late penalties have become thegratification and lack of household budgeting skillsfastest source of revenues in the industry (Drout andoften compound the problem (Simmons 1992).Silva 2003).The consumer’s avid appetite for credit has beenCREDIT CARD DEBTexacerbated by the growth of credit card companiesand their aggressive marketing practices to expandAccording to the National Survey of Consumerbusiness and increase profit margins (Sullivan, Warren,Finances, Hispanic families in 2001 were more likelyand Westbrook 2000). In 2001, credit card companies(45 percent) to have credit card debt than non-sent 1.52 billion solicitations to American consumersHispanic whites (35 percent), but less likely than(Consumer Federation of America 2001, cited in DemosAfrican Americans (50 percent). Between 1992 and2004). To entice consumers to carry more debt, credit2001, average credit card debt among Hispaniccard companies also reduced the minimum paymentfamilies rose by 26 percent (adjusted for inflation) fromrequirement from 5 percent to 2 or 3 percent of the 2,911 to 3,672, a smaller gain than those displayedoutstanding balance (Demos 2004).by non-Hispanic whites (42 percent) and AfricanAmericans (44 percent).5 Thus, Hispanic families owedAccording to a recent survey, there are 140 differentapproximately 12.7 billion in credit card debt in 2001,credit cards in the market (CAN 2004). The top U.S.less than non-Hispanic whites ( 79.8 billion) but morefirms are Citigroup with card loans of 119.8 billion,than African Americans ( 5.0 billion).followed by MBNA ( 85.8), Bank One ( 76.3), JPMChase ( 52.3), and Discover ( 48.4) (Cardweb.comAverage family income also grew during this period2003). Today, the average family has six credit cardsbut at a somewhat slower pace than average creditwith an average credit line of about 3,500 (Draut andcard debt. The largest gap was found among HispanicSilva 2003). Rates charged by credit card companiesfamilies whose mean credit card debt grew at anvary. The average fixed annual percentage rate isannual rate of 3.7 percent compared with a 3 percentabout 11.97 percent. The variable rate ranges from 4growth in mean income. Mean credit card debtpercent to 21.1 percent (CAN 2004). Credit card debtamong Hispanic families appeared to be positivelycan grow very fast when consumers make minimumcorrelated with mean family income, increasing whenpayments at interest rates that are relatively high,income rises and vice versa, but the relationship wasand when late and over-limit fees pile on top ofweak or not statistically significant. The same was trueoutstanding balances.for the other two groups.4Usury is the act of collecting or contracting to collect interest at a rate over the legal limit. Every state has some laws regulating theamount of interest that can be collected. The laws usually relate to interest collected in consumer credit transactions. Most states do nothave any regulation of the interest rate that can be charged in a commercial transaction (SmartAgreements.com).5These numbers are rather conservative since SCF’s respondents tend to underreport the various types of household debt (see Droutand Silva 2003).7

In sharp contrast, median credit card debt, a1992 peak (Figure 1). Overall, it declined at an averagemore representative measure because it excludesrate of 2.4 percent per year. At the same time, medianthe influence of extreme values, declined by 26family income among Hispanic families rose verypercent among Hispanic families, from 2,148modestly during 1992-2001, growing at an annualin 1992 to 1,600 in 2001. It edged up byrate of about 1 percent. Notice that after posting a23 percent from 1998-2001, but it remained below its14 percent gain between 1992-1995, median incomefell by 3 percent from 19982001 (Figure 2).FIGURE 1MEDIAN CREDIT CARD DEBT: 1992-2001African American familiesexperienced the largestValues in US 2001HispanicsNon-Hispanic Whitesrelative increase in medianAfrican Americans 2,400credit card debt, which 2,000the 1992-2001 period. Thealmostdoubledduringsame measure rose steadily 1,600among 1,200non-Hispanicwhites, but it droppedslightly to 2,000 in 2001. 800Except for Hispanic families, 400annual growth in median0credit card debt outpaced1992199519982001Yearmedian income growth forthe 1992-2001 period.SOURCE: Federal Reserve Board. Survey of Consumer Finances, retrieved from http://www.federalreserve.gov/pubs/oss on February 15, 2004.The median family incomeof Hispanics was found tobe a negative predictor ofFIGURE 2median credit card debt,with 87 percent of theMEDIAN FAMILY INCOME: 1992-2001HispanicsNon-Hispanic Whitesvariation in debt explainedAfrican AmericansValues in US 2001 50,000by variations in income.Thisparticularresultwas based on only fourobservations, so it should 40,000be viewed as tentative andmust wait further research. 30,000Nonetheless, the negativerelationship suggests that 20,000when income rises, thetypical Hispanic family uses 10,000less credit or pays off some01992199519982001of the credit card debt,but when income falls, theYearSOURCE: Federal Reserve Board. Survey of Consumer Finances, retrieved from http://www.federalreserve.gov/pubs/oss on February 15, 2004.family uses more credit.Thelatterimpliesthatsome families are relying on8

credit to cope with economicFIGURE 3hardship, or as hypothesizedby Draut and Silva (2003),MEDIAN TOTAL DEBT: 1992-2001these families are borrowingto make ends meet.HispanicsTOTAL DEBTmean total debt jumped by18 percent, from 38,511 in1992 to 45,322 in 2001. Thisrelative shift was greaterfornon-HispanicwhitesAfrican Americans 50,000Values in US 2001Among Hispanic families,Non-Hispanic Whites 40,000 30,000 20,000 10,000(63 percent) and AfricanAmericans(33percent).019921995Between 1992-2001, averagetotal debt growth toppedincome growth only for19982001YearSOURCE: Federal Reserve Board. Survey of Consumer Finan

immigrants are likely to turn to consumer credit counseling organizations which provide credit counseling, debt reduction services and financial education to debtors. However, there are concerns about using credit counseling services due to the industry's poor image and lack of credibility in the community. Before visiting a credit counseling