As the economic crisis continues, more and more American consumers are finding themselves barely able to pay for basic utilities. Mortgages, car loans and student loans are becoming more difficult to pay off as less and less cash is available. Many American consumers are turning to paying off these loans using credit cards and the service is getting even more convenient as it has just gotten online.
Currently, there are a few online companies that are offering credit cardholders the chance to payoff their loans and bills online using their credit cards. These companies offer cardholders who pay their bills every month many attractive incentives. One such company, ChargeSmart, allows cardholders to pay for auto loans, auto leases, mortgages, student loans and utilities online using their credit cards.
Philip Mikal, Chief Operating Officer of ChargeSmart said that the company is not targeting borrowers having debt problems. According to him, while the company has processed more than 1,000 transactions since its launching, only 1% to 2% have been for delinquent accounts. He stressed that the majority of their customers were smart spenders who wanted to maximize their rewards program by using ChargeSmart's service.
Major credit companies are also seeing that loan and utilities payment are an untapped source of income for credit card transactions. American Express was one of the first companies to see this opportunity and embrace it. In 2003, the company allowed luxury rental payments and, in 2006, it allowed luxury condominium down payments. In May of 2007, American Express introduced its Express Rewards Mortgage program to encourage even more cardholders.
IndyMac Bank and American Home Mortgage were the first lenders to offer American Express' service. When these two companies collapsed during the sub-prime mortgage crisis, American Express found itself highly exposed. However, it may have not given up on the idea just yet. Sarah Beron, spokeswoman for American Express stated that the company is evaluating the Express Rewards Mortgage program to determine what it will do next.
The problem with these kinds of practices is that it violates a long held rule in finance: Never borrow from Peter to Pay Paul. There is wisdom in this rule. When credit cardholders use their credit cards to pay their loans and mortgages, they are only digging themselves deeper into debt. If the practice continues, it could endanger not only the credit cardholders but it could bring the sub prime loan crisis into the credit card industry, further worsening the credit crisis.