December 12,2008
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Shoring Up the Credit Card Industry, Pt.2 –
– Attending Default Classes.Previous...
As for the second category; escalating default rates of credit card borrowers, innovative measures will be required. This, again, is where the government comes in. Unemployment, of course, is the worst problem and is being dealt with aggressively in areas outside the scope of this writing. What is in the scope of this writing though, is finding ways to lessen this extremely high rate that consumers are going into default. The ominous rule of thumb has been that credit card default rates generally follow the unemployment rate which is projected to rise to out-of-control levels. Powerless to curb the unemployment rampage, the government has elected to cause the industry to work better with the default sector. Credit card default classification comes in stages, escalating in severity with time.The first stage of default begins the moment a credit card holder misses a payment, even if the check is in the mail. The next stage begins at the end of the next billing cycle. The categories advance every 30 days until the 120 day mark is reached. After this, they become classed as ‘roll-offs' and are on the list to be written off as ‘charge-offs'. The government's angle is to revamp the methods of preventing ‘charge-offs' Charge-offs occur when a debt is given up on and has to written off as a complete loss. Roll-offs occur when a delinquent credit card account finally reaches this point.
The government is now in the rare position to tell the credit card industry what to do. For one thing, they will be demanding that industry ‘lighten-up' on the first level of default. Right now, a max of 5 days is allowed before ‘Default Penalty' crucifixion is imposed on a late payment. Immediate severe fees and rate hikes may be imposed on the late-paying customer at this time, even if the ‘check is in the mail'. The government wants to push that day out 30 days. Industry wants to limit it to 5 days. They contend that they need time to adjust to changes in risk that must be dealt with before the next billing cycle, Perhaps they'll settle for some time in between.