Bad 4th quarter Could Be Bad News for Cardholders
This week credit card issuers are releasing their fourth quarter results and the words "charge-off" and "delinquency" will be the theme. These are additional signs of consumer credit stress that started last year after the subprime mortgage collapse.
These are more than just words that appear in an annual report. An increase in charge-offs and delinquencies is bad news for the entire credit card industry and its
cardholders. They are an indication that consumers can't pay their bills and can't afford what they are buying. While this obviously indicates a problem for the issuer, it also is a serious issues for consumers.
A charge-off is an accounting entry that occurs if a credit card account has not been paid (delinquent) for over a period of time, typically 180 days. The issuer will remove the account from its books as an asset. After the account is charged off, the outstanding balance is then classified as a loss. This means that the lender has given up hope on collecting the debt. The lender then sells the debt to a
third party, typically a collection agency, that will attempt to collect the debt. Since the collection agency gets to keep the money they collect, they will be very
persistent about collecting what is owed.
"A charge-off is not a magic eraser that simply removes the debt. It does not free the cardholder from paying the debt. After the chargeoff, the cardholder has to deal with the pressure from a collection agency. Unless they declare bankruptcy, they will have to pay something for that debt plus interest and fees" says Bill Hardekopf, CEO of LowCards.com. "To make the situation worse, charge-offs are devastating for a credit score. It shows that you have a history of not paying your bills and this will cause you to pay very high interest rates for any future loan you apply for whether that be a car loan, home loan or even a new credit card."
Every credit card consumer can be affected by charge-offs, even those that pay off their balance every month.
"An increase in charge-offs means that the issuers are losing money, and they are going to have to find revenue to make up for those losses. This means that they may look to every cardholder to pay a little more," says Hardekopf.
"Over the past two years, we have observed issuers adding fees to balance transfers, reducing grace periods, increasing late fees and over the limit fees, and increasing
the cash advance rate. It seems like all of these are very high now and that there is no way they can squeeze another penny out of consumers with these fees. But we also used to complain about paying $2 for a gallon of gas, and now that seems pretty cheap," says Hardekopf.
"Credit card issuers are also reducing their credit risk as well as tightening their approval requirements. If you have average to poor credit, it could be more difficult to get a credit card. After the tightening of home equity loans and credit cards, there are not many places left to turn for credit if you have an average credit score or some negative marks in your credit past. Your only option for credit might be secured credit cards."
These are more than just words that appear in an annual report. An increase in charge-offs and delinquencies is bad news for the entire credit card industry and its
cardholders. They are an indication that consumers can't pay their bills and can't afford what they are buying. While this obviously indicates a problem for the issuer, it also is a serious issues for consumers.
A charge-off is an accounting entry that occurs if a credit card account has not been paid (delinquent) for over a period of time, typically 180 days. The issuer will remove the account from its books as an asset. After the account is charged off, the outstanding balance is then classified as a loss. This means that the lender has given up hope on collecting the debt. The lender then sells the debt to a
third party, typically a collection agency, that will attempt to collect the debt. Since the collection agency gets to keep the money they collect, they will be very
persistent about collecting what is owed.
"A charge-off is not a magic eraser that simply removes the debt. It does not free the cardholder from paying the debt. After the chargeoff, the cardholder has to deal with the pressure from a collection agency. Unless they declare bankruptcy, they will have to pay something for that debt plus interest and fees" says Bill Hardekopf, CEO of LowCards.com. "To make the situation worse, charge-offs are devastating for a credit score. It shows that you have a history of not paying your bills and this will cause you to pay very high interest rates for any future loan you apply for whether that be a car loan, home loan or even a new credit card."
Every credit card consumer can be affected by charge-offs, even those that pay off their balance every month.
"An increase in charge-offs means that the issuers are losing money, and they are going to have to find revenue to make up for those losses. This means that they may look to every cardholder to pay a little more," says Hardekopf.
"Over the past two years, we have observed issuers adding fees to balance transfers, reducing grace periods, increasing late fees and over the limit fees, and increasing
the cash advance rate. It seems like all of these are very high now and that there is no way they can squeeze another penny out of consumers with these fees. But we also used to complain about paying $2 for a gallon of gas, and now that seems pretty cheap," says Hardekopf.
"Credit card issuers are also reducing their credit risk as well as tightening their approval requirements. If you have average to poor credit, it could be more difficult to get a credit card. After the tightening of home equity loans and credit cards, there are not many places left to turn for credit if you have an average credit score or some negative marks in your credit past. Your only option for credit might be secured credit cards."
Posted by Lynn at
8:59 PM
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