American owe $970 billion in Credit Card Debt

The credit crunch saga continues to unfold as borrowers fall behind on payments, defaults continue to rise, and investors continue to be hammered.

Historically, the credit-card industry has been able to weather economic downturns because of its pricing flexibility. As the economy slows and payments are late, card companies have been able to boost earnings through late fees and higher interest rates, much to the chagrin of consumers like you and me.

These days, however, consumers are finding it difficult to repay any of their debts and are just not paying at all. Now charge-offs, which represents the amount which is still owed but the creditor writes off the account balance as a bad debt, are increasing at a fast pace and beyond what was expected. The losses are estimated to far surpass what companies were hoping to make with extra card fees and higher interest rates.

The net charge-off rate on credit-card defaults might escalate to 10 per cent in 2009; double the average of 5 per cent over the past 10 years, reaching $18.6 billion in the first quarter and US$96 billion by the end of next year, according to Innovest.

As horrible as this is for the national economy, it's actually good news for consumers, because credit card companies are now more willing than ever to re-negotiate debts. Thus, if you're willing to take on the stress of trying to re-negotiate your debt without the help of an intermediary, you are more likely than ever to be able to convince your creditors to significantly cut your balances in half.

This is definitely one of those cup half empty / half full kind of situations. Thanks to Trinidad Express for the update.

Frugal is the New Black

I was listening to NPR while driving into work today, and there was a segment about how fashionable it is now to be broke. Later, I read this article on Reuters:

"As the fashion industry recycles silhouettes and colors from past generations, Clarky Davis, The Debt Diva, says revisiting another style trend can help consumers ease the pinch of the troubled U.S. economy. But this style isn't about shoulder pads, wide lapels or hem length, it's about taking a page from your grandparents' or great-grandparents' notebook and saving more than you spend. That's right. Frugal is the new black." (Reuters)

That's comforting to know. At least we can be stylin' when we end up in Bankruptcy Court.

New Rules for Credit Card Companies

The FED and the Office of Thrift Supervision (OTS) announced new rules for credit card issuers in December 2008. The rules do not go into effect until July, 2010, which feels like a pretty long ways away.

The key changes that the new legislation will require are:

Elimination of Double Cycle Billing – Double Cycle Billing allows credit card companies to charge interest on both the previous and the current month's balance. If you are a person that occasionally has a balance, but often does not, then you will pay much more in interest charges than you should. Cardholders with revolving balances aren't affected as much, unless their balance fluctuates dramatically from one month to the next.

45-Day Mandatory Notification of Interest Rate Increases – Lenders will no longer be able to increase the interest rate on existing balances except in special situations, like delinquent or default accounts. After the new law passes, any existing balance will have to be billed at the original interest rate. This in itself is a major achievement for consumers and will significantly reduce the amount of interest unfairly paid to creditors.

Fair Payment allocation – Lenders will have to apply any amount paid beyond the minimum balance due to the portion of the balance owed with the highest interest rate. Currently, most lenders apply these payments to the amount owed with the lowest interest rate. Again, this will reduce the total interest consumers pay credit card companies.

Elimination of Universal Default – Currently, credit card companies can increase a consumer's interest rate if she or he defaults or misses a payment on another bill. One of my fellow colleagues had a Bank of America credit card go from 6% to 30% because they were late on an unrelated bill. In my opinion, this has been one of the credit card industry's most unscrupulous tactics and I am overjoyed that legislation will stop this insanity.

The Right for Consumers to Institute Credit Limits - Consumers will be able to set a fixed credit limit, which they cannot exceed. This will prevent credit card companies from being able to charge over-limit fees.

Americans Spend More Than They Make

At nearly $64 billion, Americans are still spending $2 billion PER DAY more than they make - on a global basis. We make up the shortfall, as we all know, with debt. Corporate debt. Government debt. And my personal favorite, private debt.

Thanks to dailyreckoning.com.au