Time to clip the credit cards. They are getting way too expensive...
Credit-card issuers have drawn fire for jacking up interest rates on cardholders who aren't behind on payments, but whose credit score has fallen for another reason. Now, some consumers complain, Bank of America (BAC) is hiking rates based on no apparent deterioration in their credit scores at all.
The major credit-card lender in mid-January sent letters notifying some responsible cardholders that it would more than double their rates to as high as 28%, without giving an explanation for the increase, according to copies of five letters obtained by BusinessWeek. Fine print at the end of the letter—headed "Important Amendment to Your Credit Card Agreement"—advised calling an 800-number for the reason, but consumers who called say they were unable to get a clear answer. "No one could give me an explanation," says Eric Fresch, a Huron (Ohio) engineer who is on time with his Bank of America card payments and knows of no decline in the status of his overall credit.
Didn't GM once make cars? Now it makes losses on the housing market.
Feb. 5 (Bloomberg) -- GMAC LLC, the auto and mortgage lending company 49 percent owned by General Motors Corp., posted a $724 million fourth-quarter loss as bad loans in the U.S. rose to a record.
The net loss compares with a profit of $1 billion a year earlier, the Detroit-based company said in a statement. GMAC, whose majority owners include Cerberus Capital Management, is talking to buyers for parts of the Residential Capital mortgage unit, which had a $921 million loss.
GMAC vowed today to make money in 2008 after falling home prices and record U.S. foreclosures led to a $2.3 billion loss for 2007. Auto finance profit slid 77 percent as sales declined at GM's North American unit. Moody's Investors Service cut its ratings on GMAC and ResCap, citing concern about ResCap's liquidity and the effect on GMAC's financial health.
If 2007 was the year of subprime, 2008 will be the year of credit card defaults. The banks are loaded with unsecured debt, and the US consumer is overloaded. Defaults are rising, and things will get much worse, particularly if the economy slips into recession.
SAN FRANCISCO - Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come.
An Associated Press analysis of financial data from the country’s largest card issuers also found that the greatest rise was among accounts more than 90 days in arrears.
Experts say these signs of the deterioration of finances of many households are partly a byproduct of the subprime mortgage crisis and could spell more trouble ahead for an already sputtering economy.
“Debt eventually leaks into other areas, whether it starts with the mortgage and goes to the credit card or vice versa,” said Cliff Tan, a visiting scholar at Stanford University and an expert on credit risk. “We’re starting to see leaks now.”
The value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October from a year earlier at 17 large credit card trusts examined by the AP. That represented more than 4 percent of the total outstanding principal balances owed to the trusts on credit cards that were issued by banks such as Bank of America and Capital One and for retailers like Home Depot and Wal-Mart.
At the same time, defaults — when lenders essentially give up hope of ever being repaid and write off the debt — rose 18 percent to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission.
Serious delinquencies also are up sharply: Some of the nation’s biggest lenders — including Advanta, GE Money Bank and HSBC — reported increases of 50 percent or more in the value of accounts that were at least 90 days delinquent when compared with the same period a year ago.
The AP analyzed data representing about 325 million individual accounts held in trusts that were created by credit card issuers in order to sell the debt to investors — similar to how many banks packaged and sold subprime mortgage loans. Together, they represent about 45 percent of the $920 billion the Federal Reserve counts as credit card debt owed by Americans.
Until recently, credit card default rates had been running close to record lows, providing one of the few profit growth areas for the nation’s banks, which continue to flood Americans’ mailboxes with billions of letters monthly offering easy sign-ups for new plastic.
Even after the recent spike in bad loans, the credit card business is still quite lucrative, thanks to interest rates that can run as high as 36 percent, plus late fees and other penalties.
But what is coming into sharper focus from the detailed monthly SEC filings from the trusts is a snapshot of the worrisome state of Americans’ ability to juggle growing and expensive credit card debt.
The trend carried into November. As of Friday, all of the trusts that filed reports for the month show increases in both delinquencies and defaults over November 2006, and many show sequential increases from October.
Discover accounts 30 days or more delinquent jumped 25,716 from November 2006 and had increased 6,000 between October and November this year. Many economists expect delinquencies and defaults to rise further after the holiday shopping season.
Mark Zandi, chief economist and co-founder of Moody’s Economy.com Inc., cited mounting mortgage problems that began after this summer’s subprime financial shock as one of the culprits, as well as a weakening job market in the Midwest, South and parts of the West, where real-estate markets have been particularly hard hit.
“Credit card quality will continue to erode throughout next year,” Zandi said.
Filing for bankruptcy is no longer a solution for many Americans because of a 2005 change to federal law that made it harder to walk away from debt. Those with above-average incomes are barred from declaring Chapter 7 — where debts can be wiped out entirely — except under special circumstances and must instead file a repayment plan under the more restrictive Chapter 13.
Here is the shocking story, which first appeared in the London times.
In October last year Hannah Mayne walked into the local branch of NatWest Bank and asked for an overdraft of £50. Although she was an unemployed teenager whose only income was from benefits, the man behind the counter said that would be no problem. In fact, she could have £1,200 if she wanted. Ten minutes later Hannah walked out with £850 in cash in her pocket and the facility to access £350 more. Three weeks after that she took a heroin overdose. She had spent every penny of NatWest’s money on drugs.
Taken on its own, the irresponsible way in which a bank will lend to a young person with no discernible way of paying it back these days is a worrying enough story. As the high street banks recently announced record profits, the Office of Fair Trading is demanding new rules to outlaw reckless lending. But what makes this case worse — much worse — is that the bank had been told by Hannah herself that she was a drug addict. Hannah’s mother, Kate, an interior designer who specialises in historical buildings, had persuaded her to do the responsible thing by cutting off her money supply for drugs. Together she and Hannah, then 18, visited her local branch in Brighton and asked it to stop giving her credit — by credit card or overdraft — because she was a drug abuser and would only rack up debts to feed her habit. The member of staff there listened sympathetically and wrote the details into her file. Kate and Hannah remember her turning the computer screen around and showing them what she had written.
But several months later, frantically trying to placate a dealer to whom she owed money, a dishevelled Hannah went to a NatWest branch again to chance her arm in pleading for £50 to offer him as an interim payment. She was, she says, amazed when the offer came back to lend her 24 times that amount. “I didn’t really understand when they said ‘You can have the money in your hand today’,” she says. “I was in there only five or ten minutes.” Anxious to get out of Brighton, she and a fellow addict disappeared to Birmingham together. While she was away her mother opened her bank statement and saw to her horror that Hannah was £1,199.97 overdrawn. Kate phoned the branch and told it in tears that the agreement not to give Hannah any more credit had been broken. “If she overdoses, I will hold NatWest responsible,” she said.
A few days later that is precisely what happened. The hospital in Birmingham called Kate and said that Hannah was in intensive care. If her friend hadn’t found her in the hostel, she would have died. The branch told Kate it could find no information about Hannah’s condition on her file because the computer would wipe off any notes after a certain period of time.
Hannah recovered, but that was by no means the end of her problems. It transpired that Natwest was charging Hannah £40 a month for the overdraft. Her entire income comprises £70 a week income support and £160 a month disability allowance. Kate urged her to apply for a special loan to pay it back but, in one of the strange anomalies of modern banking, she was told that she didn’t qualify because “her income is from benefits”. So, asked her mother, she qualified for the £1,200 overdraft while on benefits but not for a loan to pay that debt back? Yes, said the bank. This baffling — and, in Kate’s view, immoral — contrariness is one of the main reasons that she has decided to speak out about Hannah’s problems and the way in which the system generally, ranging from drugs support projects to the NHS, thwarts families trying to cope with a child on drugs. NatWest in effect, and irresponsibly, bankrolled her daughter’s overdose, she says. It offered a compromise deal in which it would waive the bank charges and Hannah could pay it off at £30 a month. The Maynes refused on principle since they maintained that it was the bank’s fault for having given out the money in the first place.
Americans are becoming increasingly dependent on the plastic.
· In January, revolving credit, which is largely credit card debt, was up 6.4 percent over the previous year.
· Credit card debt is running at the 14.5 percent of after-tax income. This debt is the highest level on record.
· Interest rates on credit cards average more than 13 percent. That is the kind of interest rate that would make loan sharks blush.
Here is some free financial advice. It is never a good idea to carry credit card debt. If you can't pay off your bill in one month, then don't use your card.
The world is drowning in personal debt. This story from Bloombergs illustrates just how serious the situation has become:
"Deng Yijun, a cargo freight agency manager in Shanghai, faced a dilemma last December. “I needed a car, but I didn't want to use up my savings as the stock market was booming,'' she says. “So I used credit cards.''
Deng, 32, was eyeing a Ford Focus that cost about 200,000 yuan ($25,815), roughly equal to her savings. Maxing out three cards, she put 140,000 yuan on plastic and gained 56 days of interest-free credit. She paid the rest herself. Most of her remaining cash went into stocks, including Sichuan Swellfun Co. - a distiller whose share price more than tripled in the past year.
Deng says she was able to buy the car for three times her annual salary and purchase stocks after card issuers Bank of Shanghai, China Merchants Bank Co. and China Construction Bank Corp. gave her credit over the phone."
Think for a moment about the implied risks; Deng's personal net worth; and lending standards in Chinese banks.
Deng starts with sufficient savings to buy this car and be debt free. However, she avoids the safe option and entangles herself in high levels of personal debt in order to maintain her over-inflated and risky investments. She would be well advised to sell her shares and pay down her debt. However, those rising stock prices are just too tempting; greed wins over financial prudence.
So she goes into debt, and she isn't thinking small. The debt to income ratio implied by this transaction is on the high side. After some arithmetic, it is clear that Deng has credit card debt equivalent to 2.1 times annual income.
The interest payments will take up a large chunk of Deng’s disposable income, because interest rates on credit cards are always extortionate. Therefore, she has to be anticipating that the return on her equity portfolio is higher than the interest payments on her credit cards.
Furthermore, Deng’s personal balance sheet looks decidedly risky. On the asset side, she has a car, which is always a depreciating asset, along with some overvalued Chinese equity. It would only take an unfortunate collusion in the rush hour and a substantial correction in the stock market, and poor Deng would be seriously upside down. In other words, she would be all liabilities and no assets.
In sum, there is a high probability that Deng will default on this debt. If there are enough Deng's out there in China, then the banks that own that credit card debt have some serious issues to resolve.
But what about the banks that allowed Deng to open herself up to these massive risks? They allowed Deng to accumulate such an enormous debt simply by talking to her on the phone. At the risk of understatement, lending standards do seem to be a little lax in China at the moment.
Unfortunately, Deng is a worldwide phenomenon. The names might change, and the transactions might be different, but across the planet, ordinary people are being encouraged to take on huge amounts of debt that they can barely service. For the most part, this debt is financing over-priced real estate. However, it is also financing unsustainable levels of consumption.
Unfortunately, this spend fest can not continue indefinitely. The easy way out of this mess would be for central banks to hike interest rates. It will be painful, and too late to save Deng, but at least it would discourage other people from being buried in debt.
However, central banks are always cowards. They will wait, and wait until it is too late. It will not be a hike in interest rates that will stem the flood of toxic debt; it will be a rise in defaults. Suddenly, commercial banks will remember that there is such a thing as credit risk, they will stop financing the Dengs of this world. There will be no more Ford Fiestas financed with credit cards; consumption will crash and the world will fall into a recession.
Hey! You've won a ride back to the top
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