Posted on 10/18/2008 6:58:57 PM PDT by RKBA Democrat
The impact of ultra-tight credit markets is hitting your credit cards, and you might not even realize it.
On The Early Show Tuesday, financial contributor Vera Gibbons explained that lenders are tightening terms in numerous ways, and you need to be aware of all of them to avoid possible trouble down the road.
Behind the changes is the simple fact that lenders want to protect themselves from bad debt, so they're tightening standards and practices in hopes of avoiding defaults by credit card users.
What are they up to?
LOWER CREDIT LIMITS
This is the biggest and perhaps most ominous change of all -- and something many consumers won't realize has happened to them until it's too late. Here's what's scary: You don't have to "mess up" in order for a company to lower your credit limit. Big companies such as American Express, Bank of America and others say they can and will change terms at any time, based on market conditions and the economy in general. Any "perceived risk" can also lower your limit. That includes a decline in credit scores or late payments on other bills.
How much are credit limits being cut? In some cases, the cuts are big, Some companies are lowering the limit to right above your balance, and as the balance drops (meaning, as you pay off your debt), the credit limit drops, too. That makes it VERY easy to exceed your credit limit.
Credit card companies DO have to inform you that they're lowering your credit limit, but who really reads those small-print pamphlets that come in the mail? Consumers may not know their limit has dropped until they go over it and incur a large fee. Even worse than a fee, however, is how this affects your credit score. When a credit limit is lowered, it appears that you're using a much larger percentage of your available credit. That lowers your credit score, making it more difficult to obtain a mortgage, car loan, or even another credit card.
INACTIVE ACCOUNTS CANCELLED
Something else to keep your eye on: Banks are cancelling un-used -- and thereby, unprofitable -- accounts to eliminate the costs of maintaining those accounts. An inactive card can also be cancelled if your risk profile changes. That also hurts your credit score. Again, you may not realize this is happened. If you just have the card on hand "for emergencies," you're probably not paying any attention to it. But now, more than ever, you want to protect your credit score and keep it as high as possible.
FEWER CARD OFFERS
If you consider all those credit card offers in your mailbox, you'll be glad to hear that companies are sending out fewer solicitations. HSBC has sent out 54 percent fewer offers this year; Citibank, 45 percent fewer. But if you don't have great credit, that's bad news for you. When you get those offers in the mail, it means you've been pre-approved for a card. But if you have to search out cards and apply on your own it can, once again, lower your credit score. Plus, it's simply a pain in the neck, AND it's getting harder and harder to qualify for good cards. You may have to settle for one with a much higher interest rate.
FEWER ZERO-PERCENT OFFERS
Used to be that no-fee, zero-percent credit card offers were a dime a dozen. Carrying a lot of debt? Transfer to one of these cards for free, and pay zero percent interest for a year. Now, if you even qualify, the offers are more likely to be for six months. You're also likely to pay a balance transfer fee of 3 percent or more. If you're looking for a good zero-percent card offer (AND you have good credit), Chase and Discover still have a few deals.
NO SECOND CHANCES
Mess up once and that's it, you're out of luck. Banks won't hesitate to increase your interest rate or impose big fees if you pay late, etc. It used to be that if you were a good customer, you could call and basically apologize, explain your mistake, and ask that the fee be removed or your rate re-adjusted. But no longer. Card companies are holding firm to their punishments, and no amount of cajoling will change their minds.
Not all credit card companies are banks. Ever see a Discover or American Express branch?
Congratulations.
We haven’t had a credit card in 6 years. I don’t miss them.
Six years ago, it seemed like a good idea. Now it seems like a GREAT idea.
BTW, I’ve used debit cards for car rentals, hotels, planes and countless online purchases. I’ve never had a single problem.
How would that happen? Credit cards are profitable for the many banks that still have money to lend. They are even more profitable now since many of the competitors have been hurt.
Sure, bad credits will have a hard time getting a line, but everyone else will do fine.
I have had that "attitude" for years, and never had trouble getting credit when I needed it, at reasonable rates. Having 25% or more down payment on credit purchases consistently goes a long way to achieving that.
Plus I can totally ignore fraudulent or improper demands for payment without a second thought. Example, years after I moved and paid off my phone bill in total a telephone company who bought the first started demanding payment for service they had never provided. Eventually they went away...
No.
If you don't carry a balance, they only make a little bit of money on the fees they charge the merchants for processing. A borrower with a high balance who will never pay off the balance is worth a whole lot more as a customer. Where else is anyone but a loan shark able to make as much interest?
The credit card company charges the retailer 3% processing....so they are making money on the transaction.
They're right across the street from the Visa and Mastercard branches.
Unlike MC and Visa, you can actually bank with Discover here: http://www.discoverbank.com/
Your credit score affects your insurance premiums and the deposit requirements for rentals and utilities, among other things.
Full disclosure; I used to work for a credit card company that was not a bank. Sure, its easier to fund credit card loans with deposits, but there are other ways to raise the necessary capital.
I sure don’t see any evidence of it.
I just got my new MC renewal card feom BofA with the same $30k limit and their standard BS to transfer accounts for 0% interest.
Just last week I heard a caller on the “Clark Howard” show asking how he can get a loan for his kid to go to college? He has no debt and never did. Paid cash for his house, has no credit cards and has no credit history. Now, for the life of him, he can’t get a college loan to put his son through college.
“How do they make money on you?”
By charging every business a % for taking your card.
“rental car agencies, hotels, and many other places will simply not take cash or check.”
I found that out in the late 60s!
I needed to rent a car for my wife for 3 days when I was rebuilding the engine in hers and couldn’t rent one even after offering a deposit for the full value os the car in cash.
I had to get a friend of mine to rent it.
I’ve had a credit card ever since!
“Your credit score affects your insurance premiums and the deposit requirements for rentals and utilities, among other things. “
and these days is likely to be used by potential employers as well.
If you pay 4% net to borrow (includes mortgage deduction) you can make 8-9% tax free. The mortgage payment is simple interest and the IUL growth is compounded.
But hey, keep all that equity inside the walls of the house. When values go down you lose. Natural disaster, you lose. Unemployed and want a loan, not qualified.
Put some money into a tax free IUL and be your own bank. No non-preferred debt. Pay cash whenever for whatever.
Oh, did I mention the death benefit.
Equity squirrels. Have fun and keep fooling yourselves.
Perhaps the most likely scenario is an international and national credit collapse. To explain, the easy credit economy the world has used since about WWII is very different from economy that preceded it.
Unfortunately, it has an inherent flaw that only for the last two decades has come to light. The best evidence of this is the spiraling US national debt, that was universally agreed would eventually cause major problems, but there was no way, or at lest no willingness, to address those problems, just a consensus to “leave it up to the future to resolve.” Unfortunately, it appears that “the future” is now.
The basic premise of the post-WWII economy was reliant on deficit spending, inflation and growth, to extricate us from the problems of the traditional economy (which btw, came close to driving the US government into bankruptcy as early as 1895). Whenever there were economic problems, *more* either deficit spending, inflation and/or economic growth, were the solutions to the problem.
The way the US government could do this was with the seemingly endless numbers of creditors willing to extend credit to the US by buying Treasury bills, which gave the US government the extra cash in hand to overspend.
It is a good question how long this situation could have slowly developed into this crisis, if it was just a situation of government spending outpacing tax revenues. Currently about $10 trillion in overspending, our national debt.
However, in recent years, this chronic problem because acute, because of one of the unregulated markets in derivatives. It was like the US government’s trick, but writ large. To the tune of about $150 trillion.
In short, they locked up so much of the world’s credit, that there isn’t enough left for the US government to overspend by selling T-bills.
Elsewhere I’ve seen the analogy of a gambler in a casino, who loses, so bets “double or nothing”. He keeps losing and keeps doubling his bets, to the point where he bets the entire value of the casino. But the casino refuses his bet and says, “pay up”. He is instantly bankrupt.
In this case, already 10% of US tax revenues go to just paying the interest on the outstanding T-bills. To the point where the US is issuing T-bills to pay the interest on other T-bills. Up to now, the US has gotten away with it, because T-bills are regarded as so safe that people will park their money with them, even if they don’t get any interest, even if they have to pay interest, to own them. Right now, interest on T-bills is about 1/20th of 1% of the value of the T-bill.
When the housing crisis happened, suddenly the light dawned that there was nobody left both able and willing to extend credit Everyone who could do so had already done so.
So this is what we are afraid of now. Even successful banks will not be willing to loan money to businesses or individuals, wanting to keep their own liquidity. And this can include neither wanting to support credit cards, or underwrite them.
What exactly will be the tap that brings down the house of cards is anyone’s guess. For even if the problem is temporarily fixed, it still remains, and it could be months or years before it is hashed out.
Most likely it will be a return to a more balanced economy, where the old adage remains true at all levels: “You cannot get credit, unless you don’t need it.”
I know I am not alone in my belief that the era of “spend and borrow” will come to an end as creditor nations grow more wary about buying treasuries. I really don’t see this happening in the long term, however, unless the gold standard were revived by a major economic power, or the Euro proved over several years to be less volatile than other floating currencies.
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