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.
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?