Banks' $180 Billion Credit Card Time Bomb

from Dollars & Sense:



Banks' $180 Billion Credit Card Time Bomb
by Dollars and Sense


If the economy stays on its present dismal course, banks can expect to lose $180 billion, according to analysts quoted in the New York Times. The figure is much higher than the government's so-called "stress test" scenario of $82.4 billion in losses because the Fed presumed no increase from current unemployment rates, and because they didn't count the losses from securitization of credit card debt. Yes, the banks bundled up credit card debt just like it did bad mortgages, selling and reselling it to investors and creating liabilities far in excess of value of the underlying loans.

The average US household has over $8,400 in credit card and other revolving debt. With unemployment rising, housing prices unlikely to climb back to bubble elevations, and consumers saving more, and Congress considering curbing the most egregious predatory practices of the industry, the glory days of credit card profits for banks appears to be over.

The banks are also slashing the credit available to consumers. According to Meredith Whitney, lenders are cutting back credit lines by $2.7 trillion over the next year, a 57% reduction of available credit from just two years ago. As consumers cut back their spending, the negative feedback loop will only accelerate.

--d.f.


http://www.dollarsandsense.org/blog/2009/05/banks-180-billion-credit-card-time-bomb.html

They allow normally sane people the option to spend money they would never normally spend.

In principle, credit cards are nothing more than an ongoing personal loan. And such loans were available long before BankAmericard and Mastercard arrived on the scene.

What makes credit cards, in their current incarnation, different is that personal loans or lines of credit had a fixed term and interest rate. When you got it, you knew what your payment would be for however much you charged. And, if you missed payments, the bank could always close down the line of credit and call in the loan. But, what they couldn't do was to jack up the interest rate on a whim, and have that new rate apply to money already loaned-out. That ability to retroactively re-write the contract is what makes credit cards dangerous. Let's put it this way -- if debtors who went for the 1.99%!!! interest rate offers had truly understood that the issuing bank could and would change that rate to 15.99%, 19.99%, or even 29.99% without cause once the cardholder had run up a balance, and that this change would apply to that entire balance, do you think they would have been so quick to say "put it on the plastic?" I seriously doubt it.

...and the banks told them that everything was pretty much OK.


So it's all good, right?

debt, with only one card with a small limit (that's the way I wanted it). I realize it fucks up my FICO score, excellent payment history notwithstanding, because the score is now more dependent than ever on having many open accounts and using lots of available credit, but fuck that. I'd rather be debt-free and out of the clutches of these vampire sharks than anything else.

That wasn't always the case. Ten years ago I had two cards that had a balance of a few hundred dollars on each. I was laid off from a job and couldn't find another one to save my life, not even a minimum-wage one to tide me over ("overqualified" and all that garbage bullshit, never mind how eager and willing I was to work whenever they needed me) for over ten months, as it was yet another downturn in Ohio, which perpetually suffers from downturns (thank God I'm no longer living in that state!!!!). My child support stopped right at that time, too, since he'd lost his job as well and lived in an even more depressed area. I wasn't eligible for unemployment. I had NO income, but that didn't matter to creditors; neither did my diligent, desperate full-time efforts to secure employment. To them, I was just a lazy deadbeat bum "loafing" all day, never mind that they had a job because I and so many others didn't. I wasn't able to make any payments for months, so that balances that had been only a few hundred dollars ballooned to a few thousand each in penalties, charges and fees by the time I'd secured other employment and was able to make any payments. By then, they'd closed the accounts (fine by me!) and sent it to collections, refusing to even work with me, I had to deal with the agencies. It took a long time, but I eventually paid them both off in full. Then I cut up their offers to send me new cards and restart the accounts, and shredded all other offers I received and swore off credit cards for a long, long time. The only reason I finally got the one card I have now is the need to build up my damned credit score, since timely payments of rent, utilities, cell phones, etc., don't count and the timely car payments I was making wasn't enough, although it was something. So I made it a VERY low limit and pay off what little I charge each month, FICO scoring be damned.

The point is, if you're being crushed by debt, you are NOT free, far from it. And the cc companies are the absolute worst in crushing people, you can't win with them no matter what you do or how good your record is with them and other creditors. Get out from under them and STAY out from under them. Have a cc for emergencies (car repairs, medical bills, etc.), and that's it. The cc companies have asked for this shit by their OWN policies and actions these past couple of decades, especially with giving credit to anyone and anything that moves regardless of risk.

The reason they're seeing so much default is not just because people are carrying high balances, but because the banks just jacked up interest rates even on cardholders with good credit, and have taken rates on those with problems to usurious levels.

What determines whether or not someone carrying high credit-card balances will be able to struggle through and pay them down, or go into default on them, is primarily the size of their minimum monthly payments. Could the banks have not realized that, when people are barely getting by, a rate hike that, oftentimes, doubles those minimum monthly payments (resulting in no greater pay-down of balances, but a lot more finance charges going into the bank's pocket) will likely be the thing that sends their finances over the edge?

If the banks were really concerned about the solvency of their debtors, they would offer those in trouble a deal: in exchange for the debtor paying off more than 1% of the principal per month and cutting their credit limit to the current balance (so that the debts couldn't be run up again), dropping the interest rate to somewhere around 5%. The cardholder would get a smaller monthly payment, and still be able to pay off the debt to the bank at a faster rate. But the banks' only concern is maximizing their bottom line through charging exorbitant interest, and figuring that the minority of cardholders who will thus be forced into bankruptcy are acceptable "collateral damage." Now, they're finding that said collateral damage might be a lot larger than expected, and might seriously affect them as well. My question: since the banks have shown they don't give a damn about their debtors, why should we give a damn about them?