| Bad Credit Card Issuers or Bad Practices? |
| By Credit Federal |
Published
03/15/2008
|
Credit Card
|
|
|
|
|
Are Credit Card Issuers Lessening High Risk or Simply Feeding off Bad Credit People?
Credit card companies and their practices come under scrutiny.
Many issues are at question, such as will there be a large rise in defaults? Will credit card companies suffer huge losses? Some issuers are even preparing for losses. American Express has raised its loan loss provisions by 70 percent, while Capital One has put $2 billion aside for loan losses.
Meanwhile, plenty of consumers are experiencing credit card offers as with higher interest rates and lower credit limits as issuers attempt to protect against astronomical losses caused by high risk cardholders. At the same time; however, issuers have taken advantage of technology to know everything about their cardholders, what they buy most, where they shop, and so forth, in an effort to squeeze every possible dime out of them along with a myriad of hidden fees and teaser rates to draw in new customers.
Years ago, credit card companies required cardholders to make higher minimum payments than they do now. Combine that with higher credit card interest rates, and the potential for cardholders to not be able to payoff the accompanying high balances has likewise become greater. To combat such potential loss, credit card companies have embraced technology to detect if a consumer is becoming a high risk, to further increase the card's interest rate per its Terms and Conditions. For those consumers who have proven their high risk with a bad credit score, card issuers can still actually make money even if they default. How? By charging fees equivalent to the line of credit.
It's amazing how the penalties, fees and default interest rates that were unthinkable merely a generation ago, are now considered to be pretty much the norm, at least with people who seek; and need, a bad credit credit card. Yet, is all this the fault of credit card companies? Are they too greedy, or are they just employing successful business practices to reduce loss and the potential for loss?
It's also amazing how other companies; such as oil companies, charge exhorbitant amounts per gallon of gasoline, yet do not receive as much public outcry as do companies in the financial sector. Why? Oil companies don't bear the potential burden of consumer default as do card companies.
One thing is for certain; however. There are no hidden fees when you fill up. With credit cards; though, you do need to monitor your credit card statement to look for hidden charges. Once again, are these other charges truly necessary to minimize risk, or is it merely greed?
Another fact: In the early 80s debt was 80% of disposable income, but today it has grown to 133%, according to the Center for Responsible Lending. Yet the rate of increase in credit card debt actually slowed at the beginning of 2000, due to the housing bubble creating a shift from credit card debt to home equity loans. From 2000 to 2006, Americans borrowed a staggering $1.3 trillion from their homes. By comparison, credit card debt rose much more slowly.
By the end of 2006, however, the housing bubble had ended and so had the ability of homeowners to use home equity loans, and that's when credit card debt began climbing. In 2004, for instance, credit card debt grew at a rate of $6.25 billion a quarter. In just the fourth quarter of 2007, it grew by $20 billion.
The jump in credit card debt is what is worrisome. Perhaps that is why the federal government has suddenly become more interested in credit card practices. In both the Senate and the House, bills have been introduced to eliminate some of the worst of the fee practices, as well as the ability of credit card issuers to, for instance, impose retroactive interest rate charges.
The hope of CreditFederal.com, is that all legislatures; whether Republican or Democrat, will take an unbiased approach into researching complaints associated with the credit card industry, and to not make accusations and decisions aimed primarily at impressing their constituents. For credit to continue flowing freely, it must be allowed to protect itself from loss and to gain a profit. In return, consumers can expect better credit offers and financial companies compete for their business.
|
