Cause and Effect of Credit Card Crisis

You might say the increasing number of credit card defaults is a result of the housing crisis that led to the bank crisis, which led to thousands of people being laid off. That, of course, had to play a part.

It’s difficult to feel sympathy for the banks that took bail out money to keep operating, and then laid off thousands of workers, however. And it’s difficult to feel sympathy with the steps they are taking now to increase their profit margins.

Most consumers know what they’ve been doing: raising interest rates, adding fees, and lowering credit lines - sometimes lowering them to even less than the consumer’s outstanding balance, so that an over-limit fee is triggered.

Surveys taken in January showed that 21% of consumers had received an interest rate hike. Comparable numbers reported increases in their minimum payment and a reduction in credit lines. Experts feel that this number is low, because so many don’t read the “junk mail” that arrives from credit card issuers. If they have credit cards they either pay in full each month or don’t use regularly, they might not notice that their terms have changed.

Meanwhile, the charge-off rate in January was up to 7.1% - up 2 ½% from a year earlier. But why?

Are the credit card companies’ aggressive profit-seeking tactics a result of the increased number of charge-offs? Or the increased number of charge-offs a direct result of the profit-seeking tactics.

Many experts believe the latter is true. Thousands of consumers were struggling to make ends meet after a lay off, or after revenues in their businesses fell in reaction to the country’s economic woes. They were managing to make the minimum payments - until the minimums suddenly increased. Others were thrown for a loop when they suddenly needed to pay off a large chunk of their current balance or face hefty over-limit fees each month.

One real estate agent I spoke with had enjoyed a $50,000 credit limit, but had used it sparingly. When business fell off in 2008, he and his wife began taking cash advances to get by. And when his balance reached $15,000 he got a nasty surprise. His credit card issuer raised his interest rate and reduced his credit limit - to $9,000.

This consumer managed to make it through the crisis without default, but many faced with such a situation would not.

The drop in credit lines on one account also causes a snowball effect, because it causes a consumer’s credit scores to drop. Other card issuers, seeing the drop, then increase their interest rates and lower their credit lines, causing another drop in credit scores for the struggling consumer.

No matter what business we’re in, we need to consider cause and effect. We need to look at our actions, or our contemplated actions, and try to determine the effect they will have.

It appears that in this case, actions by credit card issuers to increase their profits may have led directly to a decrease in profits - not to mention the destruction of goodwill.