credit: orphanjones
I was reading an article this morning that just stressed another reason why cash and saving is king, and why you shouldn’t rely on debt to “get ahead”. When you do rely on debt and credit cards it will always come back to haunt you, and you’ll find you’ve become slave to that debt. From Yahoo Finance:
First came the mortgage crisis. Now comes the credit card crisis.
After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.
The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.
I like the wording in this last paragraph, how it talks about how even “creditworthy consumers” are being affected by the credit crunch. Everywhere we look we are shown how having a credit card is such an honor – and if you are “worthy” you can get one. It is a badge of honor, when it should really be seen in a much dimmer light. The article continues:
Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.
“If unemployment continues to increase, credit card net charge-offs could exceed historical norms,” Gary L. Crittenden, Citigroup’s chief financial officer, said.
Faced with sobering conditions, companies that issue MasterCard, Visa and other cards are rushing to stanch the bleeding, even as options once easily tapped by borrowers to pay off credit card obligations, like home equity lines or the ability to transfer balances to a new card, dry up.
Big lenders — like American Express, Bank of America, Citigroup and even the retailer Target — have begun tightening standards for applicants and are culling their portfolios of the riskiest customers. Capital One, another big issuer, for example, has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent in the second quarter from the previous period, according to regulatory filings.
Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.
While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action.
It’s interesting to me that the credit industry is finally making some decisions now that they probably should have made a long time ago, including “tightening standards for applicants” and reducing credit lines. In the past just about anyone could get a credit card, and the limits were sky high, even for those that they knew would have trouble paying the loans back.
I’m not convinced that they’ll really tighten their standards as much as some think, but any step in that direction is a positive one I think. None of this is an issue, of course, for those who don’t use credit.
What do you think about the looming credit crisis? Should the companies be tightening standards and keeping spending limits lower on the cards they give out? Are you seeing the effects of this “credit crisis”
Looming? I think for many people it is already here. You are right, though, that this crisis brings into sharp relief the dangers of relying on credit and debt.
Companies probably are right to tighten up standards. After all, loose lending is part of the reason we’re here.
Mirandas last blog post..Car Shopping: Lease Returns
I don’t consider tightening of consumer credit standards to be a crisis at all. Instead, I view it as reason and logic returning to the credit markets. I wish people would stop referring to it as a “crisis” because it reinforces the belief among broke consumers that they are “victims.”
Mr. ToughMoneyLoves last blog post..Want to be in a Working Family? (Hard Workers with Money Need Not Apply)
I think I’ve been throwing away less credit card offers that come in the mail but that’s about it…
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I think one of the best things that might come out of the economic crisis is that not only will credit tighten up but people will become more aware of how they are spending their money and using credit. I just wish that credit had tightened up enough to keep my 18 yr old daughter from getting her first credit card. Sigh!! She is all the way across the country so not much I can say ….
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They, like any other, are only in it for the money. Truely, they will find some way… go offshore… hit more minority segments…. increase existing credit lines… whatever it takes to prop up those margins again. Sure, they will take a hit…. and it will be ugly… but they will again sink their way into the wallets of as many people as will apply.
As new economies come online and more middle classes are developed, more lines of credit will be opened.
(but if you want to have fun like I do, take the card offers and write “no thank you” on the application and mail it back in the postage paid envelope. Think of it as keeping a US Postal worker employed…. ;) )
Joshuas last blog post..The Humility Effect
That’s funny. I like that – keeping the post office alive!
In our Financial Peace University class for fun we’re bringing in all the credit card offers we get to see how much cred it we could possibly apply for and get. In the last clas with 7 couples we were offered over 1 million in credit.
We in the UK are hoping that the Bank of England reduce interest rates now so that the biggest credit burden on our lives (mortgages) are more in line with realistic requirements. Repossessions are seriously on the increase at present, interest is high, and credit card companies are still offering ‘deals’ at extortionate rates which will not help people in the long run, but are being snapped up by those in desparation.