Hold On To Your Hats And Sunglasses, Here Comes The Credit Card Meltdown
We hope you're enjoying our current economic roller coaster because it's likely to continue -- According to a new report from research firm Innovest Strategic Value Advisors, titled "Credit Cards at the Tipping Point," the fun has only just begun. As the credit crunch begins to affect consumers, they're going to have more difficulty paying their credit card bills. The report suggests that credit card companies' misleading practices and cavalier extension of credit may come back to bite them. Who should be worried? Capital One.
From The Red Tape Chronicles:
The report by the research firm Innovest Strategic Value Advisors, titled "Credit Cards at the Tipping Point," predicts that fallout from the credit crunch will lead to a sharp increase in credit card defaults in the coming year, making $1 out of every $10 owed on credit cards impossible to collect. That will force banks to write off nearly $100 billion in credit card debt, it said.
"A long build-up in consumer indebtedness, deteriorating economic conditions and a potential 'sudden stop' in credit availability could cause charge-offs to rise dramatically into 2009," the report says.
Misleading practices by credit card issuers will come back to bite them, say report author Gregory Larkin and Laura Nishikawa, as uninformed consumers who wind up facing surprise interest rate hikes and fees will be more likely to default on their loans. The report concludes that Capital One is most at risk, due in part to its aggressive marketing and "fee-trapping" strategies.
"The data points to an unsustainable business model based on penalty pricing, and the company is worst-in-class by Innovest standards," the report said.
Some more troubling details from the Red Tape Chronicles:
- Outstanding credit card debt has grown by more than 75 percent since 1999.
- More than 50 percent of Capital One's cards are "low-limit" cards, which Innovest said are designed as fee traps -- consumers with low limits are more likely to surpass those limits and face penalty charges. (CEO Fairbank maintains that low-limit cards are simply a smart way to manage risk)
- Risky borrowers with low credit scores -- subprime borrowers -- account for roughly 30% of outstanding credit-card debt.
CREDIT CARDS AT THE TIPPING POINT? [Red Tape Chronicles] (Thanks, Doug!)
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Comments:
Sadly, the folks that are paying their cards on time, every time, get to enjoy the "benefits" of having their credit lines slashed and having a faceless corp that itself engaged in very risky practices, question their ability to pay.. Nice..
This is the time to cancel those Credit Cards. Show your creditors that you're not in the mood to pay for *their* recklessness.
If this means a decrease in the number and frequency of those obnoxious Capital One commercials, I say bring it on.
How do these companies create a business model that depends on failure in order to profit? It was doomed from the beginning. EPIC FAIL
Yay, let me be irresponsible with my card so that the credit card company can give me a better rate after the credit card companies get bailed out!
Sadly, the folks that are paying their cards on time, every time, get to enjoy the "benefits" of having their credit lines slashed and having a faceless corp that itself engaged in very risky practices, question their ability to pay.. Nice..
This is the time to cancel those Credit Cards. Show your creditors that you're not in the mood to pay for *their* recklessness.
Does this mean since I pay my credit card bills I'm going to miss out on ANOTHER bailout?
Dang.
When is anyone going to call BS on the CC companies that manipulate your credit (balance chasing limits so that you are always maxed out, moving due dates so its impossible to pay them the same day each month) so that your FICO score drops, and then ups your interest rate because your FICO score dropped?
Fee trapping? I don't think that I have ever heard that term before.
@AugustaCassiopeia: So far many people who use their cards responsibly are not encountering trouble (though now is not the time to go nuts with credit limit increase requests and new lines of credit). I've only been getting more.
There is a breed of credit card holders that have extremely high credit limits and use only a tiny portion of what they have. They've been getting burned a little by companies like American Express with credit limit decreases and closed cards.
The people who are suffering most are those who carry balances (even at a good APR). They are being seen more as a risk now than before, and are enjoying wonderful practices such as 'chasing the balance'. If a person has credit card debt, now is a good time to pay it off.
@shaman66: No... now is not the time to cancel those cards. Don't give bad advice. It hurts your FICO score and it will only be harder to get credit down the road. Now is the time to use those cards more responsibly than ever before.
And they don't care one bit when you cancel your card. Life goes on. You're the loser in that deal...
I'm unfortunately one of the ones who has a little bit of credit-card debt to their name, just over 4k from when I moved out west and had to get the apartment all set up and replace my computer that had ended up dying on me. But I can at least say on the positive side that It's not an old debt and I'll have it paid off before christmas at this rate since I'm throwing most of what I have at it. On the positive side though, my credit line won't be slashed if I have that balance on the card still, if anything I expect to see the limit raised so the bloodsuckers can try and get more from me.
I just don't believe the report about Capital One. While other banks have thrown credit cards at me, Capital One has been very conservative. Even after applying I was given a low credit limit which I have not been able to raise. It's not a big problem though because if I want to exceed my credit limit one month I just go on line I just pay off what I owe when I get close to the limit. I love Capital One because it is one of the few banks that does not take advantage of customers by charging the international transaction fee.
@AugustaCassiopeia: Huh? Amex just sent me a letter raising my limit by like 25%. I've always paid the card off every month. I'm guessing that they just like the way I've been charging my school tuition to it. :)
I hate charts that are not clearly defined... this can either be really bad or data used to show what the person wants to show.
In particular, it looks to me like the chart shows real wages (mean or average) for people, vs total personal credit card debt (not mean or average,based on the label). This is horribly misleading as there is no way to put it in perspective compared to the number of employed persons in the country... yes its still bad, but not as bad as it seems from the chart.
Just my opinion.
Credit card companies need a meltdown. Though a good amount may use credit cards responsibly, alot don't. Companies prey on these people and they are going to get bit. Companies preyed on people who shouldn't have gotten mortgages or higher then they should have mortgages and look where it got.
@AugustaCassiopeia: Actually, I recently got better benefits (they were already great) from Chase. I assume this is because they want to keep the lowest-risk customers on their books now more than ever.
Worst credit card of all time. Notice the fees.
They may tap you, or your wallet...or something.
@AugustaCassiopeia: Strongly agree with your sentiment. Strongly disagree with your suggestion though!
It's like cutting off your nose to spite your face. The credit card companies couldn't care less what you do to your own face. They're not the ones getting hurt. Only time your suggestion has a possible chance to work, is if everybody does it without ANY exceptions.
And trust me on this one, it will never happen. Those with the money (or at least those with the knowledge of the credit system will never do it). Unfortunately, even those on the flip side, will not do it either for various reasons of their own.
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This is the time to make those credit card companies pay, especially if they wronged you when it's reasonably unwarranted.
Why close your credit card account? You're doing EXACTLY what the financial institutions want you to do!
Not only do you let them get away with it the easy way, you're further damaging your potential to get credit later in the future.
Keep the account open and use it once to make a menial charge every 4-6 months. Let THEM pay for the privilege of keeping you as a customer.
Cash has its place (even more than what some of those on the pro-credit camp will have you believe), but so does credit too (even more than what Dave Ramsey and company will have you believe)
I think (1) this is the fault of everyone but the people who are buying things they can't afford and (2) Congress should just pass a lw making the government pay the credit card bills. ITS OUR RIGHT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
@AugustaCassiopeia: I save a good deal of money by using credit cards, so for me canceling them to send some sort of message would just be cutting off my nose to spite somebody else's face.
I think I have more sympathy for predatory mortgage borrowers. There's lots of stuff in there that can be confusing and buying a house is an emotional time to begin with. But predatory credit card lending? I don't know how much sympathy I have for people on that front. Cue the SNL skit "Don't buy things you cannot afford."
Has anyone studied the South Korean credit crisis of (I think) 1999-2004 and the lasting consequences? If so, could someone point me in the right direction to some info (and no, Wikipedia doesn't have anything obvious and Google isn't helping much).
I haven't had a CC since paying them all off about 7 years ago (my wife keep an emergency card), but after reading what is going on in the economic marketplace I have to wonder what leverage creditors will have as things inevitably get worse.
If there only recourse is damaging the credit of people who already have damaged credit then why would any of these people pay their balances?
It seems that the current trajectory is one that creates a grey market for those people who have cast aside/defaulted on credit agreements. You can't just discard that large a percentage of a consumer base can you?
It seems that we are stuck in a vortex that no stimulus package or bailout can stop.
I remember, back in the day, getting a credit card was (1) not easy and (2) a big step to being an adult. Then, for some reason, the companies realized that they could pre-approve everyone, send out mailings, appear at every sporting event and give everyone a card. During the first sign of trouble, they appealed to congress to shore up bankruptcy laws in their favor, making it harder to discharge debt.
The funny thing is that the CC companies did not change their practice of pre-approving and signing up everyone. Now that there is a serious financial crisis, we are to read reports of all the money they are going to lose and do what? Feel sorry?
True, it is a two way road and people should not be obtaining credit that they cannot afford but I have to honest...credit cards saved my life when I was laid off from a job after moving across the country so I can see their appeal.
What sucks to the nth degree as with the mortgage mess, who will pay the most but those of us who are responsible...those who pay off their cards every month; those who did not purchase a house beyond their means; or those (gasp) who did not purchase a house because even a slightly literate primate could see that the housing market was over valued and chose to rent and save money for a time to buy an affordable house.
Just send me my tab so I can get on with my life.
I've been calling this since the housing market started to look shaky.
With the home equity lines of credit tapped out, it was only a matter of time before the credit card companies started seeing the same delinquency rates.
Oddly enough, I think that the economic impact of this is being vastly underestimated. Our buying has become increasingly more leveraged and if consumer credit dries up completely, there will be a huge drop in discretionary spending.
If this turns into a full-blown crisis, it could be a very bad year ahead.
See, I have a different problem. I have relatively fair-plus to good credit (686-700), and I have a card with a /ridiculously/ high interest rate. (See also: 26.5%.) from US Bank.
I received it as a student card, but they kept raising my limit. I'm now working on paying off debt (due to a lack of a job, it's close to maxed at 4200 out of 4750), but I've now got a solid job as a Marketing Assistant and am working to pay it down.
I really want to transfer the balance, but with the credit crisis, I don't even know if there's a good one to be found. My credit should go up further in a couple of months, since they had to do a hard pull for me to get my apartment in August, and I know that drops my FICO.
Any advice on what in the world I should do?
Here, in a nutshell, plus the phantom $$ from the housing market, explains much of the economic "growth" of the past eight years.
How's The Ownership Society looking now?
I do plan to cancel a couple of my credit cards, primarily because I've finally paid off the balance and I don't want to pay another 'yearly fee' for the privilege of having their card (and the companies refused to waive it when I called last year). I've gotten a few other cards (that don't have a fee), so I still have plenty of credit when I need and I don't anticipate needing a credit score to buy a house or car anytime soon.
@neilb: Over the past week I've gotten about 400% more offers for balance transfers from Chase & Citibank. Now it makes more sense.
@testsicles: True, but CC companies are using some shady tactics to extract greater fees from you as well. For example, changing the due date to a earlier time impact those pay their balances off every month. It has the side effect of allowing them to raise your interest rates if you happen to carry a balance since you missed a payment and are now a risky borrower. There's also "universal default" where the CC companies raise your rates because you missed a payment on something else or there's been a negative impact on your credit score. I'm not saying people shouldn't be responsible for their actions, they should. But if I use CC's responsbibly, pay them on time, etc. my CC should not try to trick me or extract extra fees from them. This should apply even if I have a balance. Not all people who carry balances are deadbeats who just can't maintain discipline.
the thing that gets me is that there seems to be a lot of reverse capitalism going on. Usually capitalism breeds competition and brings down prices, better service etc. whether we are talking about credit cards, cell phones, airlines, hotels, bank fees, cable companies...they all seem to now be self-serving with little regard for customers.
Capitalism should be making these credit card companies LOWER interest rates to attract business. They should be fighting each other to offer 0% transfers or guarantees that the interest rate will NEVER go over 10% if you pay more than the minimum each month. Offer services for those who are not payin their bills that for every 3 months you pay on time and more than the minimum, they subtract 1% off your rate. maybe those people will start paying then. Instead their responses are to cut limits and raise interest rates. someone like me who has paid on time and in full for 10 years gets a notice in the mail that they are raising my rate to 21.9%. how does that even make sense in a capitalist market?
they must all be fighting each other to match profits but I find it hard to believe that Capitalone wouldn't steal customers from other credit cards if they offered programs like this. apply this notion to any of the other markets I listed above and you'll see drastic changes in the market.
@howie_in_az: Likely nothing. As mentioned, the market is much lower. Also, while it's irritating to lose your 52 inch TV, the government won't step in to make sure you keep it.
@kamel5547: The chart also has my pet peeve: sticking the x axis at whatever random point they want to make the graph look more dramatic. Yes, sometimes it's probably better for showing changes over time that would be much more subtle (or unnoticeable) on a full-scale chart, but I think it's manipulative.
Especially since now there are charts of the Dow all over, and even otherwise intelligent people can't help but get anxious when they see the line crashing towards and almost hitting the bottom. It's nowhere near the bottom.
Which is not to say that things are good, but I think perspective is being shoved away by this bad chart-making.
FYI, Dow component AMEX has the most exposure to risky borrowers in its business and actually functions as a legitimate lender instead of selling debt securities. Which means their vaunted consumer protections will fall in the face of their propensity to extent credit to higher-risk borrowers. The Capital One CEO is right - smaller-limit credit cards might be "fee traps" but they also hedge individual bets on higher-risk borrowers.
Credit default spikes that take down companies aren't just a function of evil corporations, in other words. Sometimes, financial corporations just take on too much risk. You can't draw a straight line from "evil corporations" to "crushed in a wave of default." Consumers deserve a portion of the blame, no?
@henrygates: who's happy with paying 25%? my point was that they are all playing follow the leader. one airline charges for baggage and they all follow. one bank raises atm fees $1 and they all raise them. One cell phone company raises text rates and others follow suit. Why are none of them coming out with new features to make things faster and cheaper...because they are padding their own wallets and it's coming back to bite them.
My credit card hasn't really been affected yet (no rate hike, no limit change) but the "amount available for cash advance" has taken a nose dive by 300%, even though my current balance is under $100. I never use cash advances on the card but Discover suddenly seems really concerned that I might.
@mizj: I agree wholeheartedly. My New Year's resolution was to minimize dealings with companies whose profit margin depends on my screwing up: fee-trapping banks, credit cards, and mortgage companies, (use cash wherever possible and pay down mortgage at a high rate) cell phones with overages, (prepaid FTW!) Blockbuster, (Net-freaking-Flix) etc.
It's made me a happier person.
@AugustaCassiopeia: This is actually a bad time to cancel cards, especially if you've been a good and reliable credit card user for a number of years. Reacting to a market change by drastic measures is not a good decision. The best course of action is to continue paying credit cards on time, in full, and if you think they'll decrease your limit because of other peoples' mistakes, ask for an increase, and when you get it, stay put.
@howie_in_az: Since they're the same people who brought about the mortgage meltdown (on both sides of the thing) probably about whatever they ask for.
@oneandone: Yes, we don't know the source data, but as far as the x-axis concern, doesn't it show that the 1999 version of these metrics was pegged at 100 (in what units, who knows) and then the graph proceeds from there?
Good. No sympathy from me. I'd like nothing better than to be the one pulling the trigger while the CC companies are lined up against a wall. You want to preapprove everyone? This is what you get.
Maybe I'd have more sympathy if they wouldn't keep jacking up my rates unilaterally. I love how my minimum APR is now 17.99 (originally like 11.xx after the 0% for 18 months, then 14.xx after the first card expired, then 17.99 minimum after the second card expired). Not like my credit isn't good either. Its actually gotten better. Yeah I love being rewarded for a high score with a higher rate. Nothing will make me happier than goose-egging this card (racked up some debt while displaced post-Katrina) next year.
I'd be surprised if Amex was affected much by bad debt? Unless they have a ton of people on their credit cards, instead of on their old charge card system. To be I'd prefer if Amex dumped all the credit card people and just stuck with the charge card. I saw it as a brand dilution when any moron, like myself (haha), could get an Amex card. There's a reason why Nieman Marcus only takes Amex.
How much will credit card companies be receiving from the government?