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 13, 2009

Credit And Students: A Precarious Balance

When the credit card bill becomes  active, students, specifically college students, are going to find that getting a credit card will no longer be as easy as it is right now. That’s because the credit card bill will be regulating how credit card companies market their products to the under-21 market.

Credit And Students: A Precarious BalanceThe legislation is grounded on findings that, among credit cardholders, college students are one of the most burdened with credit debt. So much so that, by the time that they graduate, they are already carrying debts that won’t even be paid up after several years of employment. The credit industry is quite aware of the situation but it isn’t slowing down their marketing of plastic to college students. They’re making enormous profits from this particular market and building up long-time customers, so why should they?

What Is Credit?

The basic problem is that many cardholders, and not only college students, don’t quite understand what credit is and how it should be handled. In the financial industry, credit is simply payment that is deferred for some time. The consumer can purchase an item with the understanding that it will be paid at a later date. Of course, the one who actually pays for the item is the credit company which is also who the consumer actually owes credit to. The credit company profits from being the one to take the risk of offering credit and offer the consumer credit convenience by charging interest.

Through the many years that credit companies have run their business, they have discovered many ways to earn from interest. That is why, nowadays credit cardholders have to contend with compounded interests and tempting 0% interest offers which soar to 10% once a payment is missed.

College Students

For college students, the temptation and the opportunity to spend is considerably higher compared to other credit cardholders. College students are huge plastic users. They usually use it for dining out, vacations and tech-gadgets. The convenience of using plastic coupled with the satisfaction of getting what they want right at the moment they want it, even though they will have difficulty paying for it in the long run, often get college students into a lot of credit card debt trouble.

The problem can ultimately be traced to responsibility. How responsible can students actually be when it comes to credit? Not very much, judging from student credit card debt records. With the credit card bill in place, this will hopefully change for the better. The bill enforces many measures which will ultimately give students a better understanding of credit while protecting them from making serious mistakes which will jeopardize their financial future. A great first step towards credit responsibility.