Credit Squeeze

BusinessWeek reports that more credit card issuers are refusing to cut interest rates to help out consumers in trouble. Until recently, if someone entered formal credit counseling, the card companies would often cut interest rates to zero to keep the customer paying. No longer, reports BusinessWeek.

This has at least three implications for the short term future of the economy:

First, family debts are tied to each other. If fewer consumers can get any relief, more counseling plans will fail. That means more bankruptcies, and, while they are at it, more consumers discharging other debts such as medical bills. More consumers will also take a second look at whether it makes sense to give back the car for which the loan far exceeds the value. This is also the time to look at the home mortgage and think about whether trying to make the payment after a reset is worthwhile. Don't get me wrong:  this won't affect millions, but, at the margins, a credit card squeeze on interest rates will push more people to give up altogether--and that will affect returns for other lenders as well.

Second, the race is on. If Discover won't lower rates, Citi will quickly figure out that a customer's limited funds are going disproportionately to a competitor. Time for Citi to get tough--and so on. 

Third, the news is bad on every front. Employment is down and defaults on home mortgages, car loans and credit cards are up. The consumer can't pull the load, and the lenders who made huge profits off those consumers over the past decade or so are facing big losses. The idea that a one-shot stimulus will get us out of this mess seems more fanciful every day.

For years, lenders of all kinds loved every consumer. No income? No problem! No credit history? That's OK. Overloaded with debt? We don't care. Lenders spread around money as if there were no tomorrow.

Tomorrow has come, and the cheery sales staff has been replaced by tough guys who want their money and they want it now--with interest.

Comments

[Steve Rhode]

Just reinforces what I've been bitching about for years.

The tail is wagging the dog when it comes to meaningful debt relief in the U.S. Credit counseling has zero power over the creditors, there is no negotiation and the creditors call the shots. Most DMPs are doomed to fail, and they do, because they are not created with the needs of the consumer as the starting point.

Money troubles are looked at as balance sheet issues by banks but those of us on the front line know they are really numbers that manifest themselves in emotions, broken lives, loss of self-worth, loss of self-esteem, depression and despair.

There are ways for creditors to get repaid, debtors to avoid bankruptcy and people to emerge out of the depths of bad debt without trashing lives and discarding good people.

[Raymond Bell]

I disagree with Mr. Rhodes and want to make a point that may be missing. Creditors in the past did indeed, and still do reduce APRs on credit counseling but the problems are the proposals seldom complete and if anyone has a completion rate I would like to know. I recall somewhere in the past that not only was Chapter 13 cases deemed debt servitude options to consumers but also that credit counseling served the interest of credit card issuers only. There is no doubt that there are financial problems that consumers face today but can we at least get off the blame as to who is at fault?

[Steve Rhode]

Just for clarification. I did not say that creditors did not or do not reduce some interest rates, but any reductions are at the whim and convenience of the creditors, credit counseling groups have no control over that.

Any interest rate reductions given are not designed as the best solution for the debtor. For example, what good is a massive interest rate reduction and leaving the monthly payment the same.

The reality is that creditors call the shots when you get into debt, they change the terms with little notice and then control access to what solutions you have access to if you should fall on hard times.

I'd say that upwards of 70%-80% of DMPs do not lead to full payments and satisfaction of debt. Many people just pack it in along the way and go bankrupt and other just wander off.

[Jim Wells]

I'm a little confused. While the Fed is slashing interest rates, banks are resetting rates higher on mortgages and raising rates on credit cards. So while consumers lose their homes to foreclosure or seek bankruptcy protection from credit card debt, banks can increase margins. Wonder why the Fed doesn't require banks to participate in the economic stimulus program -- wink, wink, nudge, nudge, say no more.

[Patches]

The credit industry got what they wanted. Most everything you need in this life ie. home, car, insurance, college etc... can only be obtained thru credit. Why? Inflation! Everything is so expensive. If you try to do it the old fashion way by saving. Your credit is hurt by not having any and you pay more for rent, insurance etc…. We can't live without it and that was the whole point! Now they want their cake and don't want to share. Like the little purple girl in Willy Wanka. "But I want an Umpalumpa now!".

They say that more regulation will increase costs to the consumer, I say, look at what has happened when “Lending institutions” are left to themselves….. A trickle-down that does not trickle-down. They should have called it pooling.. or damming or “take from the poor and give the best interest to the rich” …. Anti-Robbinhood economics. Don’t believe me, who are the ones credit cards profit from most? Not the rich who will pay off their loans the very next month along with getting tiny interest rates. Its people who have little or no credit, bad credit and who 8 out 10 times are below median income. How do we fix it? We know lenders will not do it by themselves. All they would do is find some way of charging extra fees and making the terms all but impossible to understand. They have to be regulated to even get close to being fair and I think that fair would be too much to ask for… wont ever happen!

[John Pottow]

Actually, Veruca Salt didn't turn purple; she went down the garbage chute. I thought of this recently as my two-year-old was throwing a tantrum.

[Frank]

Mrs. Warren just doesn't get it. We are living in a free society. People and lenders should have freedom to conduct business that would benefit them the most. She said that For years, lenders of all kinds loved every consumer. No income? No problem! No credit history? That's OK. Overloaded with debt? We don't care. Lenders spread around money as if there were no tomorrow.

Mr. Warren is very smart lady, but very retarded when she deals with free market. Do you know what happened when lenders acted reckless, the consequenc is very simple, they are going to go out of business. Many lenders are indeed out of business. The good lenders will stay in business.

Despite all the drawbacks, free market capitalism works. Mrs. Warren should live in China for a while, and get a taste of central government planning. She loves to regulate credit card companies, she thinks she is smarter than others. These are the most dangerious people.

whether is individuals or companies, people should be allowed to do things to benefit most for themselve, as long as no one got hurt and everything consensual. When someone borrows money from Discover, he should know how much the interest rates is, whether he can pay back or not. Liberals do not recognized individual responsiblity, indead it's always someone else's fault for their misfortune. Discover had to borrow at 5% to lend money out at 15%, the 10% is the risk and profit. by cutting down rates to 0%, Discover will be forced to go out of business.

Credit card companies do provide a very important role in providing short-term cash flow to needy person. How do you keep companies to bahave irresponsibly, competitions. There are plenty of competition around. Companies have to behave honorably and fairly to retain and attract cardholders. Any regulation woould do damage to society. That said, more disclosures, more understanding about credit cards is not a bad thing

[Patrick (G)]

For a banking customer, a loan is a liability, and a deposit account is an asset. On the other side of the counter, it's the deposit account that's a liability and the loans are assets....as long as the principal is sound.

The problem is that banks for the past couple of decades (perhaps?) have been fairly ruthless about managing their assets and liabilities...but without paying sufficient attention to the soundness of the underlying principal.

Banks thought they were geniuses for charging premium rates for CC debt, selling off mortgages (bought back as laundered securities) and paying out miserly rates to the few chumps who deposited more than they withdrew.

Now the wheels are coming off because their debtors don't have the assets to pay off their inflated debts,...and banks don't have the cushion of reserves to match the full extent of their obligations.

The result is that banks are going to hike fees and charges and interest rates as much as possible because *those* are their sources of liquidity. They have to, in order to survive this liquidity crunch. Never mind that they're sucking the well dry in the process.

I suspect that the first major bank that realizes this and offers truly premium interest rates to depositors is going to trigger a bank run on most of its competitors, and will be able to buy up the assets of said competitors for pennies on the dollar.

Cheers!

[Patrick (G)]

Frank,
that's a very naive view of our financial system(s).

Most of our banking regulations came about because even "good banks" were failing due to bank runs caused by a calamitous failure of "trust".

[zekezarski]

In response to Frank - an absolutely free market economy only works for business. Free market economics brought us slavery and children working seven twelve hour days in the mills. Some regulation is necessary to prevent abuses. Think that is all way behind us? Big business is still complaining about raising the minimum wage to $7.50 an hour. Maybe I'm a schmuck, but my lowest paid employee makes $12 an hour and I buy her health insurance. But then, I care about my emoployees.

[Raymond Bell]

I have professionaly known Professor Warren since 1997. As a veteran of 40 plus years in the consumer credit and collection industry with the primary responsibility of managing consumer bankruptcy cases, Professor Warren and I may have different views and opinions but I can attest to her dedication of citing wrongs and making them right. Since the NBRC hearings to date, we have both shared our views and each have respected our differences. Elizabeth, stay in the USA.

[Howard Liker]

I Said it before and I will say it again. The feds reduce their rates without any requirements that the banks reduce their rates for consumers and we wonder what is going on. Talk about corporate welfare at the expense of taxpayers.