Credit Cards » Credit Card News » Consumers To Bear The Brunt Of Credit Industry Crisis Say Experts
Date June 26, 2009

Consumers To Bear The Brunt Of Credit Industry Crisis Say Experts

There is no doubt that the credit industry is in very sad shape right now. High delinquency rates coupled with record levels of write offs have resulted in serious financial setbacks for credit card industries. The impending activation of the credit card bill in a few month’s time will also have a negative effect on the credit industry. However, in the end it will be the consumers who are going to get hit hardest, experts say.

Consumers To Bear The Brunt Of Credit Industry Crisis Say ExpertsLaura Nishikawa, researcher for RiskMetrics, a shareholder advisers group, said that credit card companies are going to abandon their traditional business models because the combination of rising defaults and tighter regulations are stifling their profits. In general, the adviser sees that lending is going to slow down with borrowers borrowing less and lending companies holding back loans.

Recently, Nishikawa authored a report stating that the credit card industry is going to change fundamentally because of the unexpected increase in credit risks and the newly established federal regulations. She also said that the results of the changes will stay with the credit industry far longer than the business cycle currently. According to her, the profits that credit companies used to enjoy are no longer going to happen. The result will be that these companies will curb the availability of credit. Consumers who have risky credit histories are going to see less or even no credit. Even reliable consumers are going to take a hit through higher loan costs and a drying up of benefits and perks.

According to Ben Woolsey of CreditCards.com, the new regulations will greatly limit the ability of credit card companies to earn profit. The companies will not taking that sitting down, however. Originally, the credit industry saw enormous profits off borrowers who would carry balances every month. Now, with that gone, the industry is going to look elsewhere and the most likely target would be borrowers who have been getting a free ride for many years. Thus, borrowers will soon see annual fees and a loss of promotional offers.

The impact of the credit industry’s actions will have a large effect on the economic recovery of the country, said Center for Responsible Lending senior researcher Joshua Frank. According to him, the recovery of the economy will be slowed down largely due to the losses in the credit industry. Credit card companies who are cutting off access to credit are also going to slow down consumer consumption. The drying up of credit will also have a psychological impact on the general consumer population and spending will slow down considerably, even among those who don’t use credit cards a lot.

Date June 19, 2009

New Threat To Subprime Cardholders: Fee Harvester Cards

While the credit card crisis continues, credit cardholders are facing numerous financial challenges ranging from sky high interest rates and fees to credit card limits dropping as fast as they pay their card balances. It seems that, with the profiteering-prohibitive credit card bill looming up for activation, credit card companies are pulling out all stops to generate as much revenue as they can and to cover their exposure to the current financial crisis. So far, this has meant raising interest rates, even for credit cardholders with clean credit histories, and cutting available credit. Now, a new kind of threat to cardholders has cropped up, targeting primarily subprime borrowers.

credit card newsAdvertisements are running on TV nowadays offering a special kind of credit card seemingly targeted to subprime borrowers specifically. Subprime borrowers are considered as high risk by credit card companies and are often exempt from getting mainstream credit cards because of their lack of capability to pay off their balances. With this new advertised credit card, it seems that subprime borrowers can finally get much needed credit. However, it seems that these cards take more than they actually give.

The main feature of these credit cards are its unusually low credit limits, usually around $700. It seems like the perfect card for a subprime borrower who wants to have credit but needs to keep it in control. However, once the borrower gets the credit, they are immediately billed for several fees which are of considerable values. These fees often take up 80% of the available credit of the consumer resulting in a drastically lowered credit amount available for the consumer.

The fees charged on these deceptive credit cards usually includes program fees, account setup fees, monthly participation fees, annual fees, add-ons such, and memberships which are included even though the consumer did not enroll for it and does not want it. These credit cards also issue high penalty fees when the cardholders exceed their credit limits. It is no surprise that these cards have been dubbed as “fee harvester” credit cards.

Credit card companies have been offering these credit cards for several years now and their collections have been in the hundreds of millions which means that many subprime borrowers, people who are already in deep financial problems, are being profited from through morally indefensible means. However, experts say that credit card companies do have the legal right to do what they are doing and are actually putting the blame on lax regulations and pre-emptive federal statutes that block state usury laws which could’ve prevented these predatory and abusive practices.

Recently, a national group for consumer advocacy is putting pressure on Congress for the passage of legislation which will stop this kind of credit practices.