Credit Card Companies Make Strategic Efforts To Ease Delinquency Fears
Sharon L. Secor
June 27, 2008
As the mortgage and lending debacle tightened up liquidity in the world of finance, leading to what has been termed a credit crisis or credit crunch, there were many in the economic world that feared the spread of loan delinquencies and defaults into the credit card industry. Naturally, the lending institutions providing credit cards were among those most concerned, particularly as many of those had already taken heavy hits on mortgage related losses, and were looking forward to further losses in that segment. This has led credit card providers to an assortment of strategic efforts to avoid losses and increase revenues. However, some of these measures have incurred the ire of consumers and attracted the attention of lawmakers.
Many Consumers Now Pay More For Less
Credit card holders throughout the nation have had some unpleasant surprises during the past year or so, as credit card companies quietly make changes in the way they do business. The cost of credit – in terms of interest rates and fees – has shot up, while credit limits, grace periods, and other benefits have been decreased. To the irritation and frustration of many cardholders, these changes have affected even those paying their bills on time.
As a June 17, 2008, USA Today article described, while home values were rapidly increasing during the inflation period of the housing bubble, credit card companies found themselves in competition with home equity loans and lines of credit as homeowners flocked to such lower interest credit options. Thus, many credit card providers increased credit limits and began aggressively soliciting consumers, including consumers falling into the sub-prime category of borrowers, with direct marketing campaigns, hoping to regain some ground against their credit providing competition.
Then, liquidity dried up significantly due to the trouble in the mortgage and lending industries and the real estate market, which soon began to affect other types of credit and lending. That´s because many of the top lending institutions making mortgages also provide credit cards, and basically, with the mortgage losses, money was very tight, leading these lenders to try to recoup their losses elsewhere. Some consumer advocates also accuse credit card companies of taking advantage of the fact that, as other avenues of credit become less available – such as a reduction of the amounts available via home equity based borrowing to consumers that are experiencing a decrease of home value – consumers will pay skyrocketing credit card interest costs and fees because they need to borrow.
Citigroup, according to a June 25, 2008, story in the New York Times , after a widely publicized campaign that made use of the slogan "A deal is a deal" – referring its backing away from such practices as universal default and other industry practices that result in abrupt changes of terms and conditions for consumers – is now having to reconsider their position. After "more than $40 billion in write-offs during the last year, largely because of investments linked to mortgages," Citigroup is in a serious struggle for fiscal viability.
Other lenders did not so publicly repudiate such unpopular industry practices and, thus, have not gotten the same degree of publicity for their changing interest and fee rates. In addition to shocking increasing in interest fees, even to those that are paying on time, another strategy that is being employed by many credit card providers is a drastic reduction of credit limits, as industry research and history indicates that borrowers maxing out their cards before defaulting is not uncommon.
A New York Times article published on June 21, 2008, offered numerous examples of consumers being taken by surprise by such decreases. One man, a college administrator, making regular payments on the balance of his Chase issued credit card, a card he didn´t use all that often, was surprised to find that his $20,000 limit was unexpectedly reduced to $4,000. Some credit card issuers use a technique the New York Times said was referred to as "chasing the balance," which is lowering the credit limit as the balance owed is paid down.
An Uneasy Balance – Extending Credit While Risking Loss
While lenders fearing the effects of a wave of credit card debt default are concentrating on risk management, the fact remains that in order to make money, they have to extend credit to consumers. Some institutions, such as Washington Mutual, despite losses of more than $9 billion – so far – in mortgages, are making credit available to those that are not included in the prime category of borrowers. This group is attractive as they will pay more for credit, as they have fewer options, but the risk of default is higher, making the move a high-risk gamble for a lending institution already suffering from significant losses.
That, however, is the story of almost all the major lenders right now. Reeling from billions in mortgage losses, dealing with the affects of an economy struggling against steadily increasing oil and food prices and assorted other challenges, lenders are in a position of having to take real risks in order to remain profitable. Naturally, they are going to do their best to mitigate loss potential and to pass associated costs on to consumers. Consumers, though, can reduce the amount they pay for credit by being more careful about their spending patterns and reducing the degree to which they rely on credit cards.
The credit card industry is going through a difficult period of time, much like the consumers that are relying on credit cards to make ends meet as the price of everything continues to rise. Because many of the major credit card issuers are lending institutions that also sustained heavy losses in the mortgage industry, and are expecting even more losses in the coming months, in addition to keeping a watchful eye on the economy and the consumer in hopes of avoiding significant credit card debt defaults, they have to struggle to make up their other losses. This is going to mean more expensive credit to many consumers for the time being, until the various aspects of the economy in currently in turmoil settle down, making this an excellent time for the consumer to develop less credit reliant spending habits.
Many Consumers Now Pay More For Less
Credit card holders throughout the nation have had some unpleasant surprises during the past year or so, as credit card companies quietly make changes in the way they do business. The cost of credit – in terms of interest rates and fees – has shot up, while credit limits, grace periods, and other benefits have been decreased. To the irritation and frustration of many cardholders, these changes have affected even those paying their bills on time.
As a June 17, 2008, USA Today article described, while home values were rapidly increasing during the inflation period of the housing bubble, credit card companies found themselves in competition with home equity loans and lines of credit as homeowners flocked to such lower interest credit options. Thus, many credit card providers increased credit limits and began aggressively soliciting consumers, including consumers falling into the sub-prime category of borrowers, with direct marketing campaigns, hoping to regain some ground against their credit providing competition.
Then, liquidity dried up significantly due to the trouble in the mortgage and lending industries and the real estate market, which soon began to affect other types of credit and lending. That´s because many of the top lending institutions making mortgages also provide credit cards, and basically, with the mortgage losses, money was very tight, leading these lenders to try to recoup their losses elsewhere. Some consumer advocates also accuse credit card companies of taking advantage of the fact that, as other avenues of credit become less available – such as a reduction of the amounts available via home equity based borrowing to consumers that are experiencing a decrease of home value – consumers will pay skyrocketing credit card interest costs and fees because they need to borrow.
Citigroup, according to a June 25, 2008, story in the New York Times , after a widely publicized campaign that made use of the slogan "A deal is a deal" – referring its backing away from such practices as universal default and other industry practices that result in abrupt changes of terms and conditions for consumers – is now having to reconsider their position. After "more than $40 billion in write-offs during the last year, largely because of investments linked to mortgages," Citigroup is in a serious struggle for fiscal viability.
Other lenders did not so publicly repudiate such unpopular industry practices and, thus, have not gotten the same degree of publicity for their changing interest and fee rates. In addition to shocking increasing in interest fees, even to those that are paying on time, another strategy that is being employed by many credit card providers is a drastic reduction of credit limits, as industry research and history indicates that borrowers maxing out their cards before defaulting is not uncommon.
A New York Times article published on June 21, 2008, offered numerous examples of consumers being taken by surprise by such decreases. One man, a college administrator, making regular payments on the balance of his Chase issued credit card, a card he didn´t use all that often, was surprised to find that his $20,000 limit was unexpectedly reduced to $4,000. Some credit card issuers use a technique the New York Times said was referred to as "chasing the balance," which is lowering the credit limit as the balance owed is paid down.
An Uneasy Balance – Extending Credit While Risking Loss
While lenders fearing the effects of a wave of credit card debt default are concentrating on risk management, the fact remains that in order to make money, they have to extend credit to consumers. Some institutions, such as Washington Mutual, despite losses of more than $9 billion – so far – in mortgages, are making credit available to those that are not included in the prime category of borrowers. This group is attractive as they will pay more for credit, as they have fewer options, but the risk of default is higher, making the move a high-risk gamble for a lending institution already suffering from significant losses.
That, however, is the story of almost all the major lenders right now. Reeling from billions in mortgage losses, dealing with the affects of an economy struggling against steadily increasing oil and food prices and assorted other challenges, lenders are in a position of having to take real risks in order to remain profitable. Naturally, they are going to do their best to mitigate loss potential and to pass associated costs on to consumers. Consumers, though, can reduce the amount they pay for credit by being more careful about their spending patterns and reducing the degree to which they rely on credit cards.
The credit card industry is going through a difficult period of time, much like the consumers that are relying on credit cards to make ends meet as the price of everything continues to rise. Because many of the major credit card issuers are lending institutions that also sustained heavy losses in the mortgage industry, and are expecting even more losses in the coming months, in addition to keeping a watchful eye on the economy and the consumer in hopes of avoiding significant credit card debt defaults, they have to struggle to make up their other losses. This is going to mean more expensive credit to many consumers for the time being, until the various aspects of the economy in currently in turmoil settle down, making this an excellent time for the consumer to develop less credit reliant spending habits.
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