Credit card companies have made lots of money shoveling out cards to anyone they could find and then charging them high and hidden fees and astronomical interest rates.
Weren’t they worried that people might not be able to pay?
Well, yes and no. One reason for the “no” is that the credit card companies took a page out of the mortgage lenders playbook. As Arianna Huffington explains:
In another example of Wall Street “creativity,” credit card debt is routinely bundled together into “credit-card receivables” and sold to investors — often pension funds and hedge funds. Securities backed by credit card debt is a $365 billion market. This market motivated credit card companies to offer cards to risky borrowers and to allow greater and greater amounts of debt.
As households find themselves unable to meet their credit card payments, those institutions that bought the “receivables” will find themselves holding worthless assets. In other words, we face a rerun of the mortgage toxic asset crisis, a crisis that we have yet to solve. This will only drive our economy deeper into recession—no doubt encouraging the government to provide more bailouts.
Trends certainly provide reason for concern. Bloomberg.com reports that:
At Charlotte, North Carolina-based Bank of America, the largest U.S. lender by assets, 7.8 percent of credit-card accounts were delinquent in February by more than 30 days, according to Bloomberg data. That’s up from 5.9 percent last August. Delinquencies are jumping throughout the industry in tandem with unemployment, which reached a 25-year high of 8.5 percent in March.
Charge-offs, which are loans that banks don’t expect to be repaid, increased to an average of 8.02 percent in February from 4.53 percent a year earlier.
The fact that credit card companies have responded to these trends by raising fees and interest rates only makes the situation worse. Growing worried, the Federal Reserve has decided to put limits on the ability of credit card companies to raise rates on existing credit balances. Sounds good, but its initiative will not take effect until July 2010!
Something a little bolder is in order.