Debt Solution Blog

Article Summary:

Article Content:
Major banks have been hit hard by bad mortgages, fears are growing that troubled financial institutions are going to have another consumer headache to deal with: credit card defaults.

There have been no shortage of warnings about the business as the economy continues to sputter. Fearing a wave of credit card-related losses, banks have been aggressively setting aside funds to help cushion the blow. One problem, is that banks aren’t quite sure just how severe the losses will be. With unemployment rates, widely viewed as the most reliable indicator of future credit card losses, climbing to 8.1% in February - its highest level in 25 years. The widely used rule of thumb is that charge-offs typically climb to 1 percentage point above the unemployment rate. Many expect the unemployment rate to keep rising throughout the year. Even a small FICO score drop in today’s environment of tight credit can make the difference in getting a mortgage, a car loan, or another credit card, and it can have an impact on the interest rate a borrower pays. The FICO score ranges from 300 to 850 and the best mortgage rates are generally given to borrowers who have at least about 730. Banks are cutting limits in the face of a deteriorating economy. U.S. credit-card default rates reached record highs. The worsening unemployment situation is causing banks to worry that even good customers could quickly become risky customers. As a result, the companies are preemptively slashing credit lines, especially those that aren’t being used.

The banks might be tightening available credit in reaction to new federal legislation, taking effect in the middle of next year, that will restrict how credit-card companies raise rates. Among the other rules designed to benefit customers, banks will only be able to hike rates on existing balances if a customer is 60 days late on a payment, and it must provide 45 days’ advance notice before increasing rates. It pays in this environment to keep the balance-to-limit ratio below a third and keep a close eye on any changes to credit reports.
There’s no way to know how many good credit scores are being lowered by the credit limit cuts. FICO said its study showed that borrowers whose available credit was cut did not see a change to their median FICO score, which remained at 770. But the survey ended in October 2008, just as the financial crisis was beginning. It’s unclear what has happened since then. As always you should Control your Debt to take charge of your money.
credit card debt
———————