Credit Cards Could Become Next Trouble Spot in Crisis

[DuaneBidoux]

Source: http://www.cnbc.com/id/27181200

Credit-card delinquencies are likely to become the next flashpoint in the credit crisis, though the impact on the overall economy won't be as severe as the housing slump, analysts believe.

As the economy worsens and unemployment rises, more Americans are having trouble paying off their credit card balances. That has pushed up losses for credit card issuers, forcing them to tighten standards, which puts a further squeeze on cash-strapped consumers.

“After mortgages and home equity, credit cards are the next in line to feel the crunch,” says Marc DeCastro, an industry analyst with Financial Insights.



Read more: CNBC

---

And of course, how many people are trying to live off their credit cards right now? I don't think this has quite the risk of rippling through the economy since I don't think these are bundled up and sold off all over the system. But, they said the other stuff wasn't going to be bad originally too.

[yourout]

1. I have a business card that had a fixed 9% that I had a never made a late payment and

they raised it to...25%.

I was in the process of renewing my business loan so I am going to roll it in and tell Advanta to stick it up their ass.

[pattmarty]

2. Now these are the "people" that need to be castrated..........

.........and sent to Hell. For Christ's sake, they actually put the Mafia "juice loans" out of business. If ya want to get all Jesus, didn't he say something about throwing the money lenders out of the temple? In the lousy POS "chain" that is lending/usury, the credit card companies are the lowest of the low.

[snappyturtle]

3. The credit card companies need to be reigned in. They're nothing but

loan sharks in suits.

[MannyGoldstein]

4. The Whole Things Gonna Blow

I don't know what that means exactly, but I suspect that the entire thing will implode.

Perhaps our government will bail out the lenders, hopefully in exchange for resetting credit card terms to something reasonable.

[AnneD]

6. I have been cardless for 6 years now.....

I haven't missed it and my bank account has gotten fatter since they are not in MY wallet.

[RebelOne]

7. I haven't had a credit card for 2 years now.

I am under a Chapter 13 bankruptcy and not allowed to have any credit. That's a good thing because credit cards are what got me in trouble.

[AnneD]

9. I am a responsible person.....

but these credit cards are gotchas, designed to enslave you. All it takes is a few of life's emergencies and you are screwed. People use their credit cards as emergency funds and that is what causes the problem. Once I started up an emergency fund, the need for credit cards vanished.

[brentspeak]

5. Sheesh, I thought the bailout already took CC troubles into account.

[AnneD]

8. You are mistaking the new Bankruptcy Code...

passed last year....the one the CC companies bought-the one that screws the average Joe.

[superconnected]

10. I got rid of mine years ago then had to get one because I needed to show I had

a credit line to buy a house.

So it's one $2000 dollar credit card that has $1000 charged on it which is the formula to make the bank happy to give me the house loan. In the year I've had it I have paid on time every month but still been charged an excess of over $300 in late fees for paying the same day or weeks before it was due and them not processing it. I mailed in my first payment way early when I started and they literally didn't process it for 2 weeks until they could call it late.

I now pay an extra $10 per month to pay by phone and not mail in so they will process it the next night - so they say.

I'm making offers this weekend on the house and I can't wait to close the card. How would you like to pay on Friday because it's due on Monday and them not apply it until monday night and charge you a late fee - they've done it all to me. Since I'm about to get rid of it I paid $150 last month to start paying it down and saw the bill a few days ago and they had taken $50 out in fees - $10 for the online payment, and the rest calling it a late fee - I accidentally paid the day it was due. Big mistake as I knew that one from months ago. They also keep tacking on services I don't want like credit protection that cost $75 a year that I've cancelled 3 times now.

That's 1 year with this card. I can't wait to close it. It's been a nightmare just for the extra fees. I've always been to pissed to check the rate it's at. I'm sure I'd go ballistic and close it before I get the house. This should be my last month with it though.

[depakid]

11. "I don't think these are bundled up and sold off"

Yes they are, though I'm not sure how widespread these particular securities or derivitaves based on them are held.

Motley Fool gives a basic description of how it works:

Securitization, as you might have guessed, happens when you take a pool of assets that earn interest, like car loans, mortgages, or credit card debt, and package it into securities.

For example, Wall Street might take $800 million worth of credit card debt from 80,000 different people and package that into credit card asset backed securities (ABS). Whoever invests in this ABS gets paid dividends from the credit card borrowers as they pay their interest and principal. Wall Street gets a fee for overseeing this whole process, and the investor gets a yield-earning asset. Nice! For the most part, the credit card borrowers have no idea of what's going on, as long as they keep making their payments.

<snip>

There was a time when, if you originated an auto loan, you basically just kept the loan and hoped the borrower paid you on time. Nowadays, loan originators can originate loans and sell them to Wall Street securitizers for a gain on sale or securitize the loans themselves. That also means the originator often isn't the ultimate bearer of the credit risk. If the originator knows he can get rid of the loan, this might be an incentive to push for higher volumes at less disciplined underwriting standards -- a practice that greatly contributed to the subprime meltdown.

Capital One takes a big pool of credit card debt, securitizes them into credit card ABS, and sells them to other people, like banks, pension funds, hedge funds, and insurance companies. The ABS investor gets the right to the yield, and Capital One often retains the rights to the excess cash flow (or any cash flow left over after the ABS investors are paid). The same process holds for mortgage loans in Countrywide's case. The key here is that Capital One only retains a tiny portion of the ABS, so its credit risk is basically gone. This frees up its equity so it can go out and make more credit card loans and then securitize them again. Each time Capital One securitizes loans, it gets the rights to more residual cash flow.

More: http://www.fool.com/investing/value/2007/06/27/securitization-simplified.aspx