December 22nd, 2008
How the Financial Crisis is Affecting Credit Cards
Early this year, financial prognosticators were saying that the credit card industry was not going to go the way of the mortgage industry (i.e. totally implode) because credit cards had a better financial base. After all, if a credit cardholder decides to “foreclose” on a credit card, it’s not nearly as damaging to a credit card company as foreclosure on a house. A mortgage can run hundreds of thousands of thousands of dollars. Anyone with hundreds of thousands in credit card debt is in serious financial trouble. $30,000 is a lot for a credit card, while that’s dirt cheap for a house.
Add to that the fact that credit card companies are making a relative killing on interest rates and you’d think that credit card companies would be able to weather the financial crisis. If only that were so. There’s continuing talk that the credit card industry will be the next big thing to fall apart. Not only are credit lenders tied to losses in the mortgage industry, but credit cards are having problems all their own. Recent news from American Express is likely the first in a long line of potential problems.
Amex’s Problems
American Express recently requested $3.5 billion from the Feds as part of the bailout package. Amex has stated that they’re suffering from lost revenue due to the credit crisis. In the past, Amex has remained liquid by packaging credit card debt and selling them to investors in the securitization market. If this sounds eerily familiar, this is what led to the subprime mortgage meltdown, as bad credit mortgages were also packaged and sold to investors and then lost value. The market for credit-card back securities is fading.
It is surprising, in some respects, that Amex is having trouble. While spending is down overall, it would stand to reason that credit spending is up due to people not being able to afford necessities with cash. Buying groceries on credit may not be so financially wise, but for some people it’s the only option. Alas, it turns out that people are cutting down on spending both with cash and on credit. Couple that with increased defaults and it is not surprise if credit card companies are feeling the hurt. For American Express, third quarter profits fell 24 percent, or 70 cents a share.
What Does This Mean for Credit Card Holders?
OK, that’s all well and good. Amex fell 24%. What does that mean for your current credit cards, or if you are looking to apply for a card in the future? Is everyone going to get a 30% APR? Does good credit matter anymore? Here are some answers.
If you have an Amex card, you may already be feeling the heat. Amex recently lowered credit limits for 10 percent of their cardholders. Don’t rely on notifications because it is possible your credit limit may go down without your knowledge. What will happen is that you’ll go over the limit and have to pay the resulting fee. As most credit card terms state that the issuer can change rates or fees “at their discretion,” your APR and fees could very well go suddenly up. Fact is, if you have an existing balance, there’s not much you can do about this, as it’s written in the card’s terms and conditions.
Your credit cards will still work, however. One of the fears pre-bailout was that any inaction would totally freeze credit markets so your credit cards would be worthless. That didn’t happen and it likely won’t happen in the future. But whenever a lender is taking a hit, be certain that they’re going to raise rates and fees to make up the difference. This is even the case if you’ve hunted around for the best credit card deal, you have
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I feel current situation is really difficult. Maybe because our habits to spend money just for shopping before. Just never give up okay? God never leaving us alone. Merry Christmas!!!
Huh.. and AMEX just raised my credit limit by $3000 without me even asking.
How does the situation with AMEX apply to their customers that use their standard cards that require payment in full each month? Frankly, I thought that was most of the AMEX business model. While I realize one doesn’t have unlimited credit with AMEX, there is no “published” limit (and it doesn’t show up on a credit report).
yeah, i was under the impression that the paying in full each month was the primary model for them as well.