July 1, 2009The economic crisis has had an enormous effect on the average American consumer. Traditionally very free with their credit card use, the average consumer now considers carefully every purchase made on their plastic. While credit cards had become the preferred method of transaction in the past few years, nowadays cash is again becoming fashionable and with good reason.
Burdened with the economic and employment crisis, a majority of credit card carrying American consumers have been unable to keep up with their credit card debt payments. The resulting financial collapse that affected the credit card companies almost brought even the biggest and best of them to bankruptcy. It also brought forth the passage of the controversial credit card bill. The credit card bill is set to heavily regulate the way credit card companies are making profits. The result will be hat credit card companies are going to lose many of their most profitable income lines.
The upshot of all this is that, now, credit has become very expensive. Credit card companies are raising interest rates and fees like there’s no tomorrow, which is literally the truth. Consumers are, understandably wising up and being uncharacteristically careful of their credit card spending. Whereas, in the past, owning several credit cards was the norm, many credit card owners are now thinking of ditching their extra credit lines and maintaining only one or two.
One of the biggest problems with getting rid of a credit card line is that it will have a big effect on the consumer’s credit score. The credit score is what dictates the ability of a consumer to take out a loan. The lower the score, the more difficult to get a loan. One of the actors that affect a consumer’s credit score is the ratio between his available credit and the balance that he carries. Logically, by terminating a credit line, he will lose some of his available credit which will lower that ratio. However, keeping a credit card active is fast becoming very expensive. Many companies are bringing back annual fees and, for a card to remain active, the owner has to make regular purchases on it.
Financial experts agree that, nowadays, it is unwise to keep multiple credit lines. They suggest that, for those who want to get rid of unused credit lines, timing is key. Card holders who expect to take a loan should try to keep their credit score as healthy as possible. Therefore, terminating a credit line may not be advisable. When terminating a credit line, it is also important to remember that, usually, the older the credit card, the bigger its effect on the score, so card holders are advised to keep their older credit cards and terminate newer ones instead.
The biggest problem for credit card companies right now are unpaid debts. A Nilson report from April 2009 puts outstanding credit card debt at $972 billion by the end of 2008, just a few digits away from hitting a trillion dollars. The report also states that about 15% of American consumers had been late in making their credit card payments and 8% had not paid their debts at all. The resulting rise in toxic assets and write offs ultimately caused the current credit crunch.
The credit industry is considered one of the most affected sectors in the on-going economic crisis. According to estimates, the credit card debt of the nation is approaching the $1 trillion mark and is threatening to be the next financial collapse. According to a statement released by the federal government just last week, of the 19 major banks in the U.S., 12 may experience a loss of $82.4 billion at the end of the year if the federal government’s ‘worse-than-expected” economic scenario proves true.