Credit Card Squeeze Is Pushing Consumers Toward Foreclosure
USAToday says that panic by the credit card industry is squeezing customers who ordinarily would be able to pay their bills — pushing them toward financial ruin and foreclosure.
Credit card defaults are rising quickly, and the banks are rushing to keep ahead of the game — but by raising payments for already strapped consumers they may be adding to the wave of foreclosures.
USAToday says:
The growing problem is reflected in cases such as that of Dennis Spaulding, of Corona, Calif. He bought two last-minute plane tickets for his father's funeral in 2006, a purchase that increased the amount of credit he was using and made him appear riskier to banks. The result: Banks raised the interest rates on four of his credit cards — to 24% and higher — doubling his monthly payments to about $2,000.
That led to a financial spiral that has put him on the verge of losing his home and filing for bankruptcy. "I see no light at the end of the tunnel," says Spaulding, a cabinet designer.
USAToday says that according to the bankruptcy lawyers and housing counselors that they interviewed, many people are coming in for help with good mortgages — and bad credit cards.
"There's a misconception that everybody who comes in the door has a bad mortgage," says Doris Latorre, national director of quality assurance for Acorn Housing, which counsels troubled homeowners. "There are people who have good" mortgages but get into trouble with other loans when their banks change card terms, she says.
Rate increases and dramatic reductions in credit limits can push borrowers deeper into financial distress, rather than encourage them to pay their bills, says Robert McKinley, chief executive of CardTrak.com, a card research site.
The Federal Reserve is expected to issue a new rule about credit card rate increases and other aspects of the industry — but some critics are still pushing for a law that would protect consumers from rate increases on existing balances.
For those of you concerned about this trend, it seems clear that your overall debt utilization ratio (how much credit you use compared to how much available credit you have) seems to be the main thing that banks are looking at right now.
What do you think?
Changing credit card terms squeeze consumers [USAToday]
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From the article: "Spaulding, 40, says he's a conservative spender who got trapped under $70,000 of credit card debt and high finance charges after 15 years of relying on his credit card for emergencies, such as car repairs"
Humans, we are very good at fooling ourselves.
Hrmm, if I were in this position, I would probably just not pay the credit card bill. Sure, it destroys your credit rating, you have to do pretty much everything with cash and no bank will ever talk to you again, but it still beats losing my house.
@nataku83: That's not even entirely true, banks and CC companies will eventually talk to you again. You just have to wait a few years before they do.
This is definitely a place where people should learn the difference between secure and unsecured debt. For whatever reason, if you find yourself unable to pay all of your bills, the first ones to get ignored should be the unsecured ones. Pay off the house/car etc... (anything that can be repo'ed/foreclosed) and work to pay off your credit cards as you are able to.
I'm not excusing bad decisions and bad spending habits, but it should be a no brainer, you pay your house and you pay for food before you worry about other things (because let's face it a foreclosure looks worse than a few charged off credit cards)
I'm sorry, but there is simply no excuse for running up so much credit card debt that your minimum payment is $2,000 per month. It's simply irresponsible to let it get that far. Further, while no one ever reads the Terms of their credit card agreements, you do indeed agree to let the bank adjust your interest rate. If you don't like it, get a debit card.
Credit card reform could be helpful, but then again the government shouldn't step on too many things. Sometimes people are just dumb. They use their credit card over and over thinking it's free money only to realize they are in over their heads.
Now to take people with good mortgages and punish them that way for a credit purchase seems a little unreasonable.
I think too many financial things are intertwined. Bad credit means losing your house that is paid to another bank? Crazy. It's like Best Buy taking the TV you bought from Target because you couldn't pay Best Buy for a memory card you bought from them.
I know there are some bad consolidation companies out there, but there are some good ones too that will work with your banks (mainly cause they are credit card company cronies) and basically give you a loan to consolidate your credit cards and make it so that for about 3-5 years you won't be able to get a new one because you have to cancel your current ones.
basically fixes three problems unless you'd rather foreclose
@Pylon83: I can understand a credit card company freezing an individual's account if they perceive them as a risk (although, the criteria used for that should probably be something a little more standardized), but there should probably be regulation in place that doesn't allow banks to adjust interest rates on debt already in existence.
If by "credit card reform bill" you mean "introducing financial responsibility into the school curriculum" then yes.
So, it's their damn fault for getting jobs from which they can be fired from?
@OmniZero:
Bad credit means losing your house that is paid to another bank? Crazy
Only if you stop paying your house off to pay your credit card bill. Which would be pretty stupid.
@nataku83:
I like this rule. I voted yes in the poll because I was thinking of something like this. They can raise the rate on future purchases, but for them to raise the rate on my previous purchases doesn't make sense.
@nataku83:
Allowing an increase in interest in response to a corresponding increase in risk isn't unreasonable. I assume the logic for the rate increase is the hope that the credit card company will recover the actual amount "loaned" quicker, so that if the debtor does default, they are only out the interest owed, not the "principal". So if the OP charged $10k, but now owes $30k after interest and fees, the bank wants to get back at least $10k as quick as possible. By raising the interest rate and the minimum payment, they can recover their out-of-pocket quicker. If people don't like the adjustable provisions, don't use credit cards that contain them.
@sir_eccles:
I would 100% support a required financial responsibility class in schools. Lots of parents clearly can't teach responsibility, might as well let the professional educators give it a shot. I suspect you could get some banks/credit card companies to underwrite some of the costs, as they have a vested interest in at least a minimal level of financial responsibility (or at least want to be perceived that way)
OMG yes. Under the current rules CC companies are worse than loan sharks!
Even USAA is changing the rules on its customers. My card with them currently has a rate of 4.5%. Starting next Feb, the minimum rate will be 6%. No big deal, since I don't carry a balance...
@Trai_Dep: Just so I have this straight.
Joe Consumer is buying out banks thru Paulson's bailout, which gives unrestricted money to banks to do with what they will.
Then banks turn around and jack Joe's credit limit, creating usurious rates which drive Joe into bankruptcy or ruin. Joe loses his home, which pressures banks further.
This requires Joe to be tapped again to save the banks thru the no-restrictions bailout.
(repeat as needed)
Whoa, the banks must be SO happy to have destroyed the global economy while a Republican runs things.
@Pylon83:
If people don't like the adjustable provisions, don't use credit cards that contain them.
They all contain them!
Why would they be risking foreclosure? You pay your mortgage first, then the credit cards.
@jusooho: No lie. I could not imagine having $70K on a credit card. Heck, outside of school loans or a mortgage, I couldn't imagine having more than several grand in debt, period. But if I did, I'd hope I'd have the self-respect to have "Wanton Spendthrift" tattooed about my nether regions to compensate.
(I'd go for the forehead, but were I that person, I might need another loan and hopefully the loan officer wouldn't check down there)
@lawnmowerdeth: Roger that! The trouble, though, is that there is a boatload of corporate lawlessness that has led to the mess we are now in.
@Pylon83: While I understand this "logic" as well, under these economic conditions, it's basically insanity. It's kind of like saying "If I don't put gas in my car, I'll get better gas mileage" and it backed up by the huge losses banks are taking. These days, taking a risky account and increasing interest / fees / penalties, etc... seems to result in an almost immediate default as they push the account holder past the limit of what they can maintain. This goes not only for credit card debt, but every other form of adjustable loan as well.
Poor financial planning. It was just a matter of when not if this guy was going to file bankruptcy. Simple rule of thumb: if you can't pay off the credit card each month, you can't afford to live your current lifestyle. You have some choices. Make more money and/or reduce expenses. You need a positive monthly cash flow. I came to she same conclusion about 23 years ago. I got a 2nd job, working in the evenings about 14 hours per week. I never spent the money. I invested it. Now I have a nice investment portfolio. What did I miss? I have seen zero prime time sitcoms in the last 23 years. So I really missed nothing. I gained a lot.
@Pylon83: Some schools already are and it should be a nationwide required course for graduation. It needs to be taught in schools. There are too many parents who are clueless morons when it comes to finances. If they even bothered to teach what they know to their kids it could be bad information. Parents who buy all their furniture at the rent to own store or have $80k in credit card debt consisting of designer clothing, swanky restaurants, vacations & Starbucks are hardly financial role models.
One of our kids took a HS class for financial literacy last year. He knows more than most adults do now. Since things change constantly like what is the latest scam, teaching it in schools means we can also evolve the class content to tackle new bad ideas as the finance industry dreams them up.
I would have never imagined universal default would be a mainstream business tactic when I was in HS.
@madanthony: Ohhhh yes it would. I'd rather have a house to live in with nothing in it than a bunch of stuff with no house to put it in.
@kc2idf: Hey, don't leave consumer greed out of this. If people bought homes they could afford or did not buy a home at all since they could not afford it we would not be in this mess. If people did not finance a TV then we would not be in this mess. Just because the credit is there does not mean you have to use it.
Same with McDonalds, its there but you don't have to eat there. I think that we are relying on someone else to blame and control what we do.
As for the article and using it for emergencies only? $70k in emergencies. That's a joke and he is lying to himself and whomever wrote the article.
Hell I replaced the engine in my Nissan and it was $4 grand. How much does his car breakdown or is he just driving too nice of a car and should downgrade to a Focus?
I know there are extraordinary circumstances, but the majority of the people I know who are in trouble have garages packed to the ceiling with crap -- crap that cost money. I do not understand this stupidity.
@Pylon83: It's required in Illinois to graduate high school and has been for 20 years. (Not just the class, but you have to pass a test, too.) It hasn't resulted in a marked increase in financial literacy.
This site can be a little vague in their stories...I'm expected to believe that all this was over the purchase of plane tickets? I bought plane tickets last month, received a bill from the credit card company, paid it, and that was the end of it. I'm not about to lose my house. So what's really behind this story?
Why are there so many people out there who seem to think credit cards = free money? No, it's your money, and you're going to have to pay it back plus interest. I use credit cards for the sake of chargebacks and fraud protection and cash back; I pay my bills in full every single month (the only exception in my 9 years of credit history came last year when I had to pay for oral surgery out of pocket. Even then I still paid much more than the minimum on my credit card bill that month.) I just don't find it that difficult.
I even know multiple people with credit card problems. They don't seem like idiots. I don't get it. I totally understand getting into trouble if you lose your job, but otherwise...what the hell is wrong with you? Who has a $2000 minimum monthly payment unless they're fabulously wealthy and put all their spending on their credit card?
As for cc companies raising the rate on existing debt - total BS. When you incurred that debt, you did so at a certain interest rate. They shouldn't be able to change it arbitrarily for existing debt.
@Pylon83:
I'm supposing you've never been out of work, broke, and needed to buy groceries and pay rent. Let me know how that works out for you, because it happens to everyone...
@nataku83: qft. & it really makes no sense with unsecured debt. there are some shady home & auto lenders out there that basically exist(ed) to get you to default, so they could absorb any equity in the collateral. but when there's zero collateral to recover, what do you gain by pushing a borrower over the edge?
@gggtur: Clearly, if a few plane tickets pushed you over the edge, you were very near the edge already.
@nicemarmot617: The thing is, you actually didn't incur the debt "at a certain interest rate". You actually agreed to terms that said they could change the interest rate whenever they want. Complaining about them changing the interest rate on an existing debt is exactly the same as someone whining that their ARM didn't stay at 4% interest like it was at first even though they explicitly agreed to a mortgage that was adjustable rate. The moral of the story is simply to read the terms carefully, and understand what you're doing when you carry debt over. And you don't have to be a legal expert to be able to read that the interest rate can change.
@shepd: So in that case, the credit cards were a really good thing, because otherwise the people would be starving and on the streets. Why would we want to put up more barriers to people getting into credit card debt if people are only using them that way when the alternatives are far worse? Let's face it...a broke, out of work person is a high credit risk. And high risk has to be compensated by high interest rates if anyone's going to loan them money.
@nataku83: Yeah, it's hard for me to comprehend prioritizing your credit card bill above your house/rent payment. If you can't pay, pay the important stuff first.
In Dan's case, the credit card interest rate increased "doubled his payments to $2,000" meaning he was originally spending $1,000 a month on his cards. Still a goodly sum, but not completely outrageous. I carry a balance on my cards that I'm working to pay off. Not as high as the people in the articles, but more than a few thousand too.
I do hope that the new credit card rules go through and put some limits on the cards. They should not be able to raise interest on already existing balances, and they shouldn't be able to raise interest rates until one is actually late on their payments.
I also agree that High Schools should have a course on real life economics so kids don't get pulled into this kind of debt, especially while at college.
So... in an attempt at managing risk (so they say) they create the disaster they were trying to avoid?
Brilliant.
@Trai_Dep: I don't even SPEND anywhere close to $70K in a year, even including my half of the rent. Of course, if he was taking out cash advances to pay his housing bills or something, then I can see it adding up very quickly given that those are at a higher interest rate typically.
Umm, 70K in Credit Card debt?
Let him eat cake. He made his bed now he can lie in it. A fool and his money are soon parted.
[/cliche list]
@The_Red_Monkey: I saw a Susie Orman show, its on late and I was up, where a woman and her husband had finance 230k in housing renovations, jewelry, and consumer electronics on credit cards. That is so ridiculous I couldn't stop watching.
That being said, its sad when someone gets put in a bind like losing a job. And then is put through it by having all their access to emergency funds, savings and debt, to get themselves back on track.
@Jevia: We had personal finance at my high school. I was appalled to find out that the public school in town didn't nor do most schools.
It's one program I think should be required for graduation.
My credit card rate went up 5%, increasing my payment by $100 ($200 to $300). It's not a lot to some people, but for me I'm suddenly having issues paying my bill. It's really in their best interest not to do that.
@The_Red_Monkey: Of course, most of the "credit crisis" appears to me to have been caused by the abusive use of poorly regulated derivatives like credit default swaps. So while there still would have been some serious problems caused by the housing bubble bursting and people defaulting on their mortgages, we probably wouldn't have seen the whole credit market seize up and massive banks go down in flames if it weren't for the retarded and irresponsible practices of financial "professionals". The failed mortgages are just the underlying credit for the derivatives that really magnified the problem tremendously. So while obviously, yeah, we wouldn't be in this mess if more people had been more responsible with their home purchases, those people are only the spark that started the fire. It was the I-bankers and hedge fund assholes who were spreading gasoline around the room beforehand.
I also agree that $70K for "emergencies" is impossible unless he did it in a really irresponsible and stupid way like using credit card cash advances for everything.
@battra92: I don't think a course would make a huge difference, though it certainly couldn't hurt. It's already obvious to anyone with even a rudimentary understanding of math that you shouldn't borrow money at 25% interest if you don't have the means to pay it back immediately. Don't people intuitively grasp compound interest?
@mac-phisto: that's exactly my point, there's nothing to gain! These guys are using outdated risk formulae and don't know what they're doing. They're hemorrhaging money and continuing to push individuals over the edge. The only justification I can think of for doing this is it eliminates "uncertain" debt, so it's easier for accountants and analysts to make predictions when they have a guaranteed loss. Anyway, the point I was trying to make to Pylon83 was that while increasing interest rates on high risk debt may have been reasonable at one time, it no longer is.
@Belabras: Usually with loan sharks they just break your legs if you don't pay your debt, but you can keep the house. So yeah its probably a better deal!
I would vote "Yes! But laws tend to suck!"