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The Credit Card Crisis

Jose D. Roncal www.financialspeculation.com

Jose D. Roncal

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www.financialspeculation.com

Back in September, 2008 we covered a topic that we believed was getting too little attention by mainstream media: the looming credit card crisis.  In both our white paper,Consumer Debt in the U.S, and in our article,Get Ready for Another Crisis: The Coming Credit Card Debt Meltdown, we gave our readers a full report on what we saw as another economic catastrophe in the making.

The Gathering Storm
The growing level of consumer debt in the U.S. is creating a drag on the economy.
All over the world, people are keeping fingers crossed that the $700 billion financial system bailout works the way it is supposed to and eases the worsening global credit crunch and restores confidence in the markets. But while the government has been focusing its attention on worldwide fallout from the mortgage debacle and the Wall Street greed, another storm is gathering on the horizon.

Over the past couple of weeks, we’ve seen how this news is starting to pick up steam with statements like:

The Credit Card Debt Crisis: The Next Economic Domino
Hot on the heels of the banking crisis, the employment crisis, and the mortgage/foreclosure crisis, the country is on the verge of experiencing a credit card crisis.

As we mentioned in our report, outstanding credit card debt hit an all time record high of $951 billion in 2008, and judging by the credit scores of many of the cardholders, about a third of that debt might never be collected.   In fact, defaults are expected to hit 10% in 2009.  With the economy is such bad shape, the under-employed and over-extended will have no choice but to make ends meet using credit cards and piling up still more debt.

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But what do financial institutions—already weighed down with toxic assets—do when credit card payments start to default? They get creative. As we reported, banks have been doing the same thing with credit card debt as they did with mortgage-backed securities—packaging it up and selling it as securities to investors, including your pension fund.  Selling credit card debt is a $365 billion market!

As cardholders continue to default, those who bought this packaged debt will take a serious hit. And so will cardholders who are actually paying on time, or at least are trying to keep up. Credit card companies simply raise rates and fees — late fees, cash-advance fees, over-the-limit fees, you name it, there are fees for every occasion.  Never mind that you’ve never missed a payment in your life, your rates are going up and your line of credit is going down.
 
Some, like American Express, have gotten even more creative.  After having received over $3 billion in TARP money from us, the taxpayers and credit card holders, AMEX is trying to boot selected customers out of the nest all together by offering $300 vouchers if they will cancel their accounts and go away. What a sign of the times!  Card companies used to lure us in with cash rewards, now, in an effort to write you and your debt off, they are willing to pay just to get rid of customers.

Does the government really want to stimulate our economy, unfreeze credit flow and restore the financial institutions?  Does it really want Main Street to get back on its feet?  If so, here’s a thought. Let’s help the average consumer right now by capping interest rates on credit cards.  Let’s reform the entire mess we know as the credit card industry.

Is it so hard to understand that when you’re already in a hole, it’s time to stop digging?  Who decided it was wise economics to raise interest rates on consumers who are already have a hard time paying down their debt, or to penalize those who pay on time?

Congress is already focusing on bailing out the financial system, carmakers and state governments. Maybe it’s time to bail out the families who are struggling to keep their heads above the rising waters of consumer debt.  

It’s also a good time to read about risk, credit, speculation and a whole chapter entitled, Mother of All Crises: Haven’t We Learned Yet? It’s all there in our book,The Big Gamble: Are You Investing or Speculating.

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If you found this article helpful, visit www.financialspeculation.com to claim your own copy of Jose Roncal’s popular FREE REPORT, “12 Keys to Smart Speculating in Tough Times.” It’s chock full of valuable insight on how to rebuild your nest egg. While you are there, check out “The Big Gamble: Are You Investing or Speculating?” See for yourself why Donald Trump has called it “a great read!”

About the author

José D. Roncal is a truly global executive with over 20 years of experience in international business and finance, having worked and travelled frequently in six continents.

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