Happy New Year? Not for credit card companies

Reuters ^ | 12/31/08 | Juan Lagorio

[TigerLikesRooster]

Happy New Year? Not for credit card companies

Wed Dec 31, 2008 4:19pm EST

By Juan Lagorio

NEW YORK (Reuters) - U.S. credit card companies have little to celebrate as many analysts brace for 2009 to be one of the worst years on record for consumer credit.

Losses for the industry could top $70 billion, but it is hard to predict how bad the pain will be.

U.S. consumers have never before been so deeply in debt. There was nearly $1 trillion of credit and charge card debt outstanding as of October, up more than 25 percent since 2003, according to the U.S. Federal Reserve. That is in addition to $10.54 trillion in mortgage debt.

Unemployment, already at 15-year highs, is expected to rise to its highest levels since the early 1980s, when credit cards were not nearly as widespread.

In short, there's more debt than ever and fewer people are able to pay it.

"In many ways, we're in uncharted territory," said John Williams, an analyst at Macquarie Research.

[TigerLikesRooster]

These days debt is as plentiful as water during Noah's Great Flood.

[TigerLikesRooster]

Ping!

[napscoordinator]

GREAT NEWS SATURDAY!!!!!

This could not be better news. I am glad to see credit card business in a hurt locker. They have screwed with people for years and now they are getting their just due. How many people have seen their “no interest days” fall and fall? I say good riddence to each and every one of those creepy companies.

[wally_bert]

They got greedy and stayed that way for too long.

[duckman]

I still don’t see how they were allowed to increase the interest rate on existing account. Even if you were late on one or two payments.

[Camel Joe]

Credit card defaults and commercial real estate are the next two shoes to drop. Currently the Gub’ment is conducting an all out war on the invisible hand for which we will see prolonged turmoil in the marketplace. I'm betting that we will sooner rather than later be heading MUCH lower on the DOW and the rest of the worlds exchanges. With the resulting deflation many manufacturers will close their doors as they would otherwise be producing products at an ever increasing rate of LOSS. Finally at some point in the future all the money the Gub’ment has been printing will cause the opposite and inflate prices. It won't matter by then, we couldn't afford the items when they were a bargain, most won't have any money and those who do will soon give it up to the hyperinflation. I just hope to be debt free by the time it gets really bad.

[raybbr]

I still don’t see how they were allowed to increase the interest rate on existing account. Even if you were late on one or two payments.

Because Congress gave them permission to. Also, recently, I was late on a card. They put the card on hold. Never, ever happened before.

[TLI]

Losses for the industry could top $70 billion,

For the majority of the outfits in that business... I can't think of a much more deserving bunch of vultures to get ground down to nothing.

[driftdiver]

“I still don’t see how they were allowed to increase the interest rate on existing account.”

because its in the fine print that few people read.

[servantboy777]

I agree! They are reaping what they have sown.

It is a mixed bag for me though. No one twisted the arms of those in heavy CC debt, but the credit card companies hold responsibility in this mess as well.

Lots of predatory lending by CC companies. Then when one gets into financial trouble through things such as illness, loss of a job or whatever...then the wolves move in.

One missed payment can allow these companies to jack your rates from 6 to 9% to over 26%. Tack on heavy late fees, over the limit fees and so forth.

Then the snowball begins to roll. Most who begin extending themselves with easy credit card debt normally have no idea how quickly they can become ensnared.

So....here's to ya Credit Card Companies. Hope ya think twice before you extend thousands to those barely able to service it.

Oh and by the way, the government will need your home, cell, work and neighbors phone numbers to they can hound you day and night until you have a nervous breakdown.

[Atlas Sneezed]

Here is a peripheral question:

I just did my regular check of my credit status (free for all three agencies instant results at www.annualcreditreport.com).

Oddly, while two old closes Amex accounts were listed, two current ones were not. One of those has lots of bucks going through every month, as it is a business card. Why would Amex not report such an active account. Are they trying to keep competitors from learning about a 6-figure annual spender who is current in his payments?

[TigerLikesRooster]

conducting an all out war on the invisible hand

You are so right. Much-venerated "invisible hand" of market is now an enemy to "be crushed," according to economic experts these days. This is not about blunting the rough edge of invisible market's effect. Still they say they are for free market?

[yefragetuwrabrumuy]

The real problem for the CC companies is underwriting their cardholder’s debt. That is, they have to issue bonds which back the credit limits of cardholders. The amount of money involved is much greater than the value of the CC company.

And if no one will buy these bonds, then the CC companies have no choice but to first, lower CC limits, and second, to cancel cards. And this is where it punches consumers right in the face.

Say you have a monthly limit of $5,000 on your CC. If it is chopped back to $2,000, it starts to become questionable whether it will be enough credit for you, month to month. At a particular point, you will have to use checks, cash, or debit to pay for things.

But this is just an inconvenience. The real trouble is based not on you, but on the “class” of people you are lumped together with by the CC companies. While your personal credit may be fine, and you always pay your bills on time, the CC companies may decide that they can no longer support your “class”, so everybody in your “class” gets canceled, including you.

And classes are based *not* on reliability in paying bills, but in *profitability* to the CC companies. If your class makes them no money, it is worse, from their point of view, than if some members of the class default, but most owe them, and pay them money for not paying on time.

The real zinger happens when so many of the bond issues fail that the CC companies have no choice but to make wholesale card cancellations. Millions of Americans are utterly dependent on monthly credit to pay their bills. If their cards are canceled, they cannot pay rent or buy food. They are instantly bankrupt.

Many who also have bank checking will overdraft to meet their bills, and this will either force banks to cancel checking, or retailers will refuse personal checks. This leaves only debit cards and cash for all US retail.

And there is a huge shortage, right now, of both paper money and coins. Even at 100% production, the government can only back 5% of daily US retail with paper and coin. Most of that production goes to just replacing the paper money as it wears out, since bills only last an average of six months. Cash, by itself, is right now worth 20 times its face value.

This means that with a CC collapse, everyone will have to have debit cards as soon as they can get them, and cash will be king. While debit transactions can hyperinflate, cash cannot.

The “Iron Rule of Currency” is that “Good money is pushed out by bad money”. This means that when there are two competing currencies, everyone wants to save the good currency, and spend the bad currency as fast as possible.

The US government issued Treasury bills, how the US government sells debt, are forming an immense economic bubble, when the bubble bursts, the US government will no longer be able to back its
profligate spending with debt. They will likely “monetize the debt” by just declaring that they have money to spend.

But every dollar of this “fake money” instantly translates to inflation, and likely hyperinflation. But it is all virtual money, existing on computers. Unfortunately, so does all virtual bank savings that will back debit transactions.

This will in turn cause a split in our currency. If money is virtual, it will hyperinflate, but if it is physical cash and coins, it will continue to deflate. There will be a run on paper and coins at the banks, since the government would have to open currency printing offices in every US State to even inflate paper money to what virtual money had been.

And here is the zinger: US currency is valid “for all debts, public and private”. But virtual money is not. No one has to accept virtual money for anything.

It would be a very good idea to have a store of both paper money and coins in a safe place at home.

[Graybeard58]

I still don’t see how they were allowed to increase the interest rate on existing account. Even if you were late on one or two payments.

American Express raised my rates, I started to get offended by it then realized that I don't carry a balance so what difference does it make.

[HighlyOpinionated]

And why should "credit" (an idea, a puff of smoke, a promise of money for a promise to pay) not get its own bail out? The Bail Out . . . that's real dollars, right? Not just "a promise" which can be broken.

Let's look at that. I sign my Bank of America application at an initial rate of 1.9% for six months. I pay more than the minimum, but because of car expenses, dental expenses only half-covered by dental insurance, and other charges, cannot pay it off each month.

But the BoA has taken the credit (promise) they allocated to me and placed it on their "ASSETS" line. What's with that? The don't have that amount in the bank. Where's the cash? I am paying it as promised on or before the due date. The BoA is using that asset to lend out credit to others . . . up to 90% of the "credit/promise" I gave them, and then 90% of the next person and the next and the next, etc.

The only CASH they get are the payments made based on a promise. And THEN they decide to "hold" my payment for two or three days after they receive it so that they can charge me a LATE PAYMENT and then increase my rates to 19.9% And then they raise that one because again they held a payment for three days and increased my rate to 29.9%.

So, the CASH I paid them wasn't enough to make money on. But the LATE PAYMENTS AND FEES? In the MILLIONS and millions of dollars. But WAIT. MY promise was to pay at 1.9% which was to increase to 7.9% after six months. I didn't promise to pay 29.9%.

Something isn't kosher here. Ain't right either. So I go looking for a faster way to pay off my credit cards. And I contact a company which tells me that legally, banks are supposed to loan cash-money not credit. Well, I didn't get any cash from BoA so I don't have to repay my unsecured debt. If BoA had loaned me CASH and allowed me to spend it or save it as I wished, they I would be obligated to repay them. The Central Bank (aka Federal Reserve which is not related to the Federal Government) lobbied for Bank Bail Outs . . . and just WHY isn't the Bail Out being used to pay off all our Unsecured Bank Credit Cards? It should and it can. Follow this link and read the third post down . . . as of 1 January 2009, I am not paying any more credit card bills. I am legally walking away from all my unsecured debt. And I wonder what the Government would say if we ALL did the same? The banks already got their Bail Out, well, I'm getting MINE, and you can too!

[HighlyOpinionated]

Good explanation.

You do not have to repay the CC companies if the debt is unsecured. You CAN legally walk away from it all. I did and I feel so wonderfully FREE. And my money is MINE, not the CC company's. Dec 18 post on my blog.

[Magic Fingers]

“They have screwed with people for years and now they are getting their just due.”

Including bribing Congress to pass the bankruptcy law revision in 2005. Even the CC companies admitted that only 10% of BK filers abused the system...so let’s screw the other 90%, eh? It had little to do with “reform” - it had to do with changing the law to allow banks a greater range of unethical lending practices.

[rabscuttle385]

But the BoA has taken the credit (promise) they allocated to me and placed it on their "ASSETS" line. What's with that? The don't have that amount in the bank. Where's the cash? I am paying it as promised on or before the due date. The BoA is using that asset to lend out credit to others . . . up to 90% of the "credit/promise" I gave them, and then 90% of the next person and the next and the next, etc.

If someone owes you money, it's an asset to you. One man's liability is another man's asset.

[Camel Joe]

You might also consider some dry goods and things that will be needed and have a long shelf life, toilet paper comes to mind.

[Camel Joe]

What then is the value of YOUR word? It has none, and BoA does not hold payments in order to charge late fees because that is illegal. You may have had “holds” on your checking account due to debit purchases but trust me, some little bureaucrat is just champing at the bit to get an opportunity like BoA holding payments to charge late fees. Debit cards can be a real kick in the ass if you don't know the way they actually work.