November 17,2008
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Citigroup Rate Jump Reasoning and Options, Pt. 1 --
– What are the reasons?With the recent shock of Citigroup's credit card services branch (issuing bank division) doom announcements, their credit card holders are naturally concerned. The saga still unfolds as this article is being written, like the recommendations for filing Chapter 11. So what is news today, may not be news tomorrow. Here are some answers to natural questions that Citigroup credit card holders will probably have:
- Why would such a huge and reputable company renege on such a fundamental pledge as to outrightly raise credit card rates before their expiration date?
To sum it all up, they're in deep trouble (like WaMu was, only larger). This past year they had to announce the terrible news of a $20 billion loss in credit card revenues. Soon after, the company's public stock value plunged all the way down to a single digit figure for the first time in several years. In just this month alone, they lost more than 30% of stock value. Needless to say, their investors are concerned and the new CEO is expected to fix this problem soon.
- How could this happen to such a world-prominent company which has always been so strong?
To just blame it on the ‘difficult market environment' may be true, but it's a little to generalized to be of much help. But at least three major contributing factors can be explained:
- Credit card charge-off rates: The industry rate of credit card holders who have gone into default nationwide has jumped 48 percent higher than the default rate was last year (from 4.6 percent to 6.8 percent). Exact figures of dollar amounts were not provided, but it was indicated that these figures were substantial.
- Borrowing rates have greatly risen: Simply put, it now costs Citigroup substantially more to lend this credit to its credit card holders.