Whoa, Hold Up, Wait a Minute
Posted in Credit on 03/03/2009 10:39 pm by DDLSo, today, the Treasury Department unveiled the Term Asset-Backed Securities Loan Facility, which is a fancy way of saying that they’re going to unleash $200 billion into the economy to help increase the availability of credit to consumers. Okay, that’s fine. Put that into Box A in your mind and set it aside. Everyone knows that lenders have stopped lending, and the credit crunch is hurting everyone.
Now consider this - you’ve all probably read, either on this site or elsewhere, or even experienced firsthand, that Capital One, along with a bunch of other lenders, are using these “extraordinary economic circumstances” to justify raising interest rates on credit cards, in some cases from 9.99% up to 29%, and this is for accountholders who never had a late payment, who’ve been loyal Capital One customers for a decade or more. The rate jacks have nothing to do with credit scores - the collapsing economy has taken off the safety, and lenders are going to scramble to raise rates and fees while they still can, before Congressional legislation forbids them from doing so (Summer 2010). Put this into Box B in your mind.
Time for Box C. Box C contains all of the credit card holders who have run into some sort of financial difficulty, and either have started carrying balances when previously they didn’t, or just happen to be folks who have maxed out their cards or who carry balances as a regular thing. Whenever I write anything about credit usage, I always get one or two commenters who state that they pay off their balance in full every month, so they don’t ever see finance charges. Good for you, but you are in the minority, and more so with each passing month. If you’ve been laid off, or your transmission falls out of your car on the highway, or you have a somewhat major medical crisis, it’s a good bet you’re going to be carrying a balance at some point. In other words, given the economic climate, I would bet that credit card utilization rates are higher than ever before.
Now, take the contents of all three boxes and mix them together. Do you see where I’m going with this? The lenders are going to win, big time, at the expense of the consumers, and here’s my prediction of how it will all go down.
You’ve run into some trouble, so you’re using your credit cards, maybe even maxing out some or all of them. If you’ve been particularly good, you may have even gotten credit limit increases, so you’re carrying a lot of debt while you’re waiting for things to get better, but it’s at a decent rate, less than 10%. But then, you receive a letter, from Capital One or some other credit card company, stating that due to “extraordinary economic circumstances”, the interest rate on your card is increasing to 22%, 24%, or even 29%.
The government injects $200 billion dollars into the credit markets in an attempt to increase the availability of credit. So, the credit card companies, including Capital One, take the money - and loosen the credit market by increasing your credit limits. Welcome to the new economic trap.
With the economy in shambles, consumers are relying on their lines of credit more and more. Increasing the limit on a credit card virtually assures that the credit holder will use that additional credit, and not for an iPhone or some other luxury, but for food and clothing and gasoline. But now, instead of paying 9.99% interest on that higher level of debt, that consumer is going to get dinged for 29%. Lenders will be funneling consumers right into the killing zone on this one, unless there is some provision that I don’t know about that requires that credit be made available at lower interest rates.
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