Credit card loan delinquencies and defaults are soaring. Banks start hurting. Although banks can’t close the credit card accounts by law, they raise the interest rates and lower credit limit to prevent any additional purchases.
From the Red Tape Chronicles.
“Delinquencies and defaults are soaring,” said Robert Manning, author of the book “Credit Card Nation.” He said believes some major credit card issuers might not survive the current crisis. “They suspended the financial laws of gravity and put individual households on steroids,” he said. “… Now (banks) don’t really know what to do.”
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Because of card agreements, credit card issuers cannot simply close accounts and demand full payment. But they can do the next best thing: Raise the cardholder’s interest rate. They can also lower credit limits repeatedly to prevent a consumer from making any new purchases. That’s effectively the same thing as closing the account.
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Card issuers also used the same tricks as mortgage issuers to expand their empires, rolling their loans together and selling them off as asset-backed securities on Wall Street. Moving debt off their balance sheets allowed major issuers like Capital One to operate aggressive customer-acquisition campaigns. Meanwhile, investments in “credit card receivables” were a cash cow for investors.
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And they can’t turn to Wall Street for help, either. The market for credit card securities is drying up, caught in the same swirl that is dragging down mortgage-backed securities, Manning said.
