Sunday, November 16, 2008

Yet Another Collapse On the Horizon

The financial crisis has already tumbled the stock market badly and now it is the time to watch the biggest financial crisis of the year, the collapse on the horizon - this time, the credit card industry. The question is very common today that Is Credit Card Debt Next Big Economic Crisis? The answer might be with you or me and any other individual of the United States. The problems of Credit Card Debt is already affecting some consumer's finances and is the reason for growing talk of a possible credit card bailout. That bailout wouldn't be for the card companies, but rather for card holders.

Federal Regulators are allowing lenders to reduce by as much as 40 percent the amount of credit card debt owed by deeply indebted consumers in a special program. As the economic crisis has deepened and consumers increasingly are defaulting on their credit card debts, write-offs on the loans have mounted for banks and other lenders. The unusual joint request from the Financial Services Roundtable and the Consumer Federation of America highlighted the urgency of the situation that consumers with strong credit records - defaulting at high levels on their credit cards, while banks battered by the credit crisis bleed tens of billions in red ink from the losses.

The Federal Reserve reported recently that consumer credit — basically everything we all owe money on except our houses — rose more than 7 percent last month to $2.5-trillion worth of revolving debt. It’s just like what mortgage lenders were doing before the bust. I personally believe that this could be the next shoe that drops in the credit card market, or in the credit markets in general. Just as homeowners suddenly couldn't pay their mortgages, sending them into foreclosure, credit card holders in a bad economy are struggling to pay their credit card bills. And that could send them into default.

Since many people use credit cards and credit accounts as their source(s) of funding their shortfalls — the average credit card balance alone in the U.S. has recently been reported to be $8,000 per person, it is much higher for many, Personal financial responsibility is sorely lacking. Credit Card companies, on the other hand, will sometimes raise the interest rate on a person’s card simply because that person was late in making a payment on some other debt instrument. Fees can be similarly changed. Credit card companies also engage in a variety of other practices that most of us would agree are somewhat “shady.”

There are already signs of problems. Credit card companies are issuing fewer cards, raising interest rates and lowering credit limits, which can hurt your credit score.

"The best thing people can do is, if at all possible, stop using their credit cards and start paying down the balances, said Kristen Garrett of Advantage Credit Counseling."

Consumer groups are now calling for a bailout of credit card customers. Proposals would change the law, making it easier for credit card companies to reduce the debt of anyone close to bankruptcy. Unlike the Wall Street bailout, the proposed credit card bailout would not require tax dollars. The thinking is that if a credit card company truly believes you're going to file for bankruptcy it would rather collect some money over time, then none at all.

Nearly all the biggest credit card banks have agreed to a temporary pilot program in which lenders would forgive as much as 40 percent of the amount consumers owe, allowing them to pay back the remainder over time, they said. The amount of debt to be forgiven would be determined case by case, depending on the borrower's financial condition; those receiving close to the maximum forgiveness level would be nearing a personal bankruptcy filing.

The most important thing right now is to strike a balance between the lender and the consumer because Americans now are weighed down by around $900 billion in credit card debt, according to Federal Reserve figures.

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