Handling Finances

As mortgage lenders rush to revise their lending policies and greatly reduce their financial risk, credit card issuers are losing money(many of whom were bitten by subprime mortgage losses) are also pushing to return to their historically high, profitable margins. In 2007, credit card revenues rose 4% to 25 billion, but profits decreased by 35% largely due to rising delinquencies.

Bank of America recently sent out notices to it’s cardholders that they would be facing interest rate increases of 9% to 27% and apparently didn’t limit the increase to those with poor repayment histories.

Avoid higher rates as you pay off your balance

At a time like this when credit card companies are drastically raising rates, it’s extremely important to read all the fine print they send you. In many cases (as with the recent Bank of America increase) you can opt out of the rate increase if you make all your payments on time and stop making new purchases on the card. It’s vital to opt out in writing, and there are often a list of conditions and details you have to attend to, but if you’re working on paying off your credit card debt and don’t want your rates to double, the few hours it takes to keep rates low might very well be worth the effort!  Also be careful about acting on any information you receive over the phone.  Different representatives can give wildly varying responses to the same question and you should never consider any policy or agreement binding unless you have it in writing.

I’m not alone in considering interest rates in excess of 30% per year to be unethical, but at the same time I don’t see it as pure evil.  We’re seeing the true cost of offering high credit limits to nearly every American regardless of their ability to pay if they run up a tab.  Many industry practices are deplorable (like targeting those who have declared bankruptcy as they have a “taste for debt” and can’t declare bankruptcy again for years) but it’s nice to see the financial institutions getting bitten for their unchecked subprime lending.  Even more people will be harmed by this attempt by the industry to recoup costs and shed as many poor borrowers as possible, but when the dust settles, America will be a bit wiser and credit will be much more restricted for a few years.

The future of ubiquitous consumer credit

The really interesting part of the whole credit-card mess will be to see if anybody learns from recent events.  Eventually the economy will hit another long-term upward trend banks will go back to competing for ever riskier borrowers to try to beat each others’ quarterly profits.  Consumers will have recovered from debt or outlived the 7-year bankruptcy penalties and a new generation will have to learn the dangers of credit card debt all over again.

Even if the government steps in to try to regulate the industry and stop this financial disaster from being repeated, we can be sure that banks will find new, innovative ways to take advantage of consumers.  The real trick will be if we can educate the average American enough that they can make wiser choices about credit and debt in the future.  I’m ever optimistic, but I won’t be holding my breath.

This entry was posted on Saturday, February 23rd, 2008 at 6:51 am and is filed under Credit Cards, Debt, Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.