The curtain is coming up soon on Act 2 or is it 3 in the financial crisis—the credit card debt crisis.
According to the Federal Reserve, outstanding credit card debt carried by Americans reached a record $951 billion in 2008. That number continues to rise.
As the recession deepens more people are being forced to use their credit cards for survival. Not surprisingly, many of them are also finding it difficult to make their required payments. And, when that happens, banks are quickly jacking up their interest rates and fees. Actually they are doing it to everyone.
As Arianna Huffington explains:
In 2007, lenders collected over $18 billion in penalties and fees. JPMorgan Chase, the nation’s top credit card lender, recently began charging many of its customers $10 a month for carrying a large balance for too long a time — that’s on top of the interest they are already collecting on those balances.
And interest rates are escalating. Earlier this month [February 2009], Citibank warned customers that if they miss a single payment, they could see their interest go up to 29.99 percent . . . . The company also recently raised rates by 3 percent on millions of non-payment-missing customers. Citibank is not alone: Capital One raised its standard rate on good customers by up to 6 points, and American Express raised rates by 2-3 percent on the majority of its customers.
All of this is pushing more and more people into bankruptcy. And, remember those securitized home mortgages that we now affectionately call toxic assets—well the same securitization process happened with credit card debt. We are talking about a $365 billion dollar market of potentially new toxic assets held by investment banks, money market funds, and pension funds.
BUT WAIT—On April 22, President Obama met with the major credit-card issuers. According to Bloomberg.com, Obama told them that they must (and this is a direct quote): “eliminate some of the abuse,” especially with regard to rate increases on cards and changes in fees. ELIMINATE SOME OF THE ABUSE? Which part of the abuse is OK?
Perhaps not surprisingly, the head of card services for JPMorgan Chase & Co. called the meeting “a very productive conversation with the president.”
To be continued.