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”