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A Company I Hate

I celebrate capitalism. Even when I have a bad experience with a business, I'm comforted to know that in the long run bad businesses will be outcompeted by good businesses. Improvement is the norm. And I've recently encountered a company that I believe the world would be better off without.

The dark underbelly of the credit industry was revealed to me through a very interesting telemarketing call. I got the call because my credit report looks scary right now due to all the debt I'm carrying in order to make money with credit card arbitrage. My credit report fits the profile of someone in financial distress, and there are many companies eager to serve this clientele.

The company who called me, and who is the object of my wrath today, is named Fidelity Debt Consultants. (They are not related to Fidelity Investments, which is a fine company with whom I've had a good relationship.) FDC is a company preying simultaneously on both credit card companies and financially unsavvy consumers. Oooh, look at that verb, "preying" — yeah, I hate those guys.

This is actual hatred; I think they're scum. This is much beyond jokingly saying "I hate those guys" after telling a story about bad customer service. I'm actually almost to the point of saying that what FDC does ought to be illegal. That oughta raise an eyebrow or two…

FDC seeks out people with high credit card balances and offers them their services. What are their services? They're not an ordinary debt consolidator — they're a debt negotiator. And they claim that through their service you'll have about 40% of your credit card debt forgiven outright and that you'll pay the rest back, interest free, over several years. Does that sound too good to be true? I certainly thought so. So I stayed on the phone with them to collect information. Our conversation lasted about two hours, and didn't end nicely.

Briefly, this is how FDC's program works. You contract with them to negotiate your debt. Your creditors settle for about half of what they're owed, and you set up a payment plan with FDC. They claim you're paying back at 0%, but that's an illusion. FDC's fees are quite high: an enrollment fee equal to your first three monthly payments, a settlement fee of 29% of the amount they "save" you on your debt, and an administrative fee of only $49 a month — what a bargain!!

High fees are typical for companies dealing with people who have bad credit, and that's not what draws my ire. In fact, I had the opportunity to explain this to the supervisor near the end of my telephone call. He had a well-rehearsed rant on how horrible it was that credit cards could charge over 20% interest to people who were in default. It's unfair that they can jack up the interest rate like that! I countered by saying that I read the fine print on my credit cards and was well aware that they could do that and that I don't believe there's anything wrong with usurious interest rates. I had a great libertarian moment, too: He asked if I really thought there was nothing wrong with them jacking up the interest rate and coming after you "like the mob." I countered that no, they're not like the mob, because the mob will shoot your kneecap but the credit card companies are nonviolent. As long as there's no violence, high interest rates are okay. He changed the subject.

Why do I hate FDC? There's a clue to it in the structure of their program. The enrollment fee is paid with your first three monthly payments. For those three months you send money to FDC but not to your creditors. FDC's program puts you in default to your creditors. That's not an accident. It's essential. And they made the reasons for this this very clear in the telephone call.

Credit card companies know that if an account is in default for several months with no payment, they're unlikely to get repaid. They're eager to settle the account or sell it to a collection agency for pennies on the dollar, because the alternative is very likely getting nothing back at all. FDC's program is to let the account go into collection and then to go into arbitration to negotiate a lower balance that you'll pay off.

A pretty good scheme, isn't it? It games the system quite nicely. FDC will even send you scripts so you can fend off the phone calls from the collection agency! They're also honest about how their program will hurt your credit although in my opinion they downplayed the significance of that.

I told them I was skeptical that they could negotiate away my debt because I was not, in fact, in financial peril. I told them I have no trouble at all making my payments and even that I could pay off my balances in full if I needed to. (They never bothered to ask why I had so much debt.) I think this put me in their "dream customer" category — virtually no risk, and I estimate they would have made about $7,000 in fees from me.

They explained that my financial condition didn't matter. My creditors wouldn't have access to that information, so they would be happy to settle the debt for much less than the full balance. Holy information asymmetry, Batman!

Perhaps FDC's services would be appropriate for someone who was already in financial distress, already in default on their obligations. The arbitration process exists for this very purpose. My outrage is directed at the fact that FDC entices people to default. Even people like me who acquired their debt with eyes wide open, fully aware of the consequences, and easily able to repay it. FDC was asking me to default on my agreement with my creditors for the express purpose of screwing them out of what I owe them.

No. I made an agreement, and my word is my bond. I suspect that attitude is totally foreign to the employees of Fidelity Debt Consultants.

It's deliciously ironic that the only reason I've acquired this debt is for the purpose of arbitrage. I'm holding someone else's money and earning interest on it while paying them back at 0%. So in my own way I'm also taking advantage of the credit card companies. But what I'm doing is totally aboveboard and involves no deception at all. They offered me 0% and I said thank you. FDC would have me needlessly break my agreement with my creditors and then take advantage of their ignorance. Absolutely not.

The system is broken. The weak point appears to be the fact that unsecured debt is a little too unsecure. I think lenders need to insert language into their credit agreements that gives them access to information about the debtor's financial condition during arbitration. This would fix the information asymmetry so they could negotiate without being taken advantage of. It would close the loophole that FDC is depending on as it woos customers like me.

See? You shouldn't have worried! :) We don't need a law or regulation to deal with heinous programs like FDC's. We just need better credit agreements. Company lawyers, go! Make it happen!

Strangely, much of the telephone conversation was spent arguing over my refusal to give them the last four digits of my social security number. I told them that it is my policy never to reveal sensitive personal information on a telephone call that I didn't originate. They didn't take the hint and kept trying, so I had to be very firm with them. They wanted those digits plus a bank account number (so they could set up the automatic payments for their program) before they would mail me an information packet.

They claim that it costs them about $700 to mail the information because they have to do research to verify my identity and credit information and that sort of thing, so they don't want to mail the packet to people who aren't very serious about enrolling. While I very badly wanted to read their legal explanation of their program and the scripts they would have me wield against calls from collection agencies, I'm very stubborn about my no sensitive information policy.

Also, they explained that I would have several days to review the material and to call them to cancel if I wanted to. No, I won't do business that way. I insist that I read the details of a program before enrolling. They were going to set up an automatic payment from my bank account before letting me read their documentation. No way!

(I often turn down offers like this. "The first month is free, and if you read our information and don't like the program, you can call to cancel." No, no, no!)

Tiny Island