November 25, 2008
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News: Card Crunch Climate.
Amid the recent climate change, the credit card industry is looking for innovative ways to cut their losses and make their balance sheets look better. Gone, is the lucrative securitization pool. So, of the few opportunities left, losing those card holders who might default on their loans is one way to reduce liability. Increasing revenues in areas like higher interest and attaching fees, is another. Credit card lenders also have to cut other liabilities; liabilities that they formerly were able to off-load to the securitization market. Now they must carry all that liability on their own. So, formerly good client's who would always pay on time but never pay in full are now, a liability. New fees are being instituted to penalize these people into paying down debt in order to minimize the credit card issuer's liability further. (With securitization, high debt was both attractive and profitable.) The penalty fees, themselves, will also add a few bucks to the pot.
It is generally agreed that credit card interest rates are going up all over. This is not expected to be ‘doomsday' as yet, however. The Prime is still favorable for low interest rates, nationwide (The Federal Rate is still at a low one percent). The fact is, credit card rates have been falling for a while now. For example, the overall average variable rate has dropped from the 14% level a year ago to only around11.25% today. The average credit card rates have only risen slightly since last month -- from 13.75% to 13.81%. Just a year ago, they were at 15%.
Another climate change which could have a profound impact on some people is the reduction of credit limits. Again, there is more than one reason for this change, but one main reason is the bank's liability. They borrow too. They must reduce their own overhead and one way to do this is to distribute their risk. Since securitization is mostly gone away, another way to do this is by reducing the highest borrowers. Therefore, credit card issuing banks have announced they will be reducing limits for the ‘good' and the ‘bad' risk accounts. The Federal Reserve's October survey, which is the most recent, took responses from our nation's senior bank loan officers. Responses indicated that 20 percent of the banks were going to lower limits of even their best customers. Sixty percent of the banks were going to lower limits of those customers lucky enough to have interest rates below Prime. Sixty-one percent of the banks were going to start imposing more strict qualification standards, even on existing accounts.