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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October 8th, 2008
Current State of the Economic Bailout Plan
Insiders on the economy have mixed ideas on the impact that the economic bailout plan will have on the country. A federal bailout package may significantly boost the psyche of consumers and make banks more willing to extend credit, which could significantly improve the struggling economy across the nation. Unfortunately, it could also send a negative message to residents and businesses that are facing financial challenges without any help from the government.
Despite the public disapproval that is being offered regarding the $700 billion dollar economic bailout which was passed this past week, the economy is desperately in need of this assistance. Financial institutions, according to experts in the field, absolutely need this monetary assistance from the government as soon as is possible in order for our economy to rebound following recent stock market crashes and other drops.
Experts have said that without the bailout plan, more banks would have failed, causing even greater costs to the economy. If the revised $700 billion bailout plan had not been passed, the costs would have been even greater. A number of representatives received an overwhelming number of letters from constituents voicing support against the bill, causing it to fail the first time around. Luckily, within a week the bailout had found its way through because of its necessity to put the economy back right again.
Accordingly to experts in the industry, those who are against the bailout are generally people who do not understand what it is about. Most of the people who were against the initial bailout bill felt that way because they thought of the bailout as a handout to the rich rather than a way to right the economy. The real goal of the economic bailout plan is to allow the government to buy defunct loans from the banks, owning up to one third of the larger banks for a period of time in the process. Once the banks are able to regain some of their own wealth, the government would then be able to sell these bonds back, only losing between $50 billion and $200 billion in the process.
While it may not be the taxpayers’ fault that this is happening, the proper response is not simply to become angry. If the economic bailout plan does not rescue these banks and financial institutions from their current situation, the economy is going to fall a lot further, which will only make things worse. The banks need support, otherwise they are going to begin to lose a lot more money, which is going to prevent them from giving loans and mortgages to the consumers that need them. By rescuing the banks, the government is making sure that these financial institutions will continue to lend money to the individuals and families that need it most, like students and families trying to buy a new home for example.
The $700 billion dollar bailout plan may not be the most ideal solution, but it is much better than the alternative, which is to do nothing at all.
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