Tighter Credit, Loan Limits, Credit Cards on Default: What’s Next?

We’re facing a new age of tighter credit, loan limits and credit card defaults. What does the future hold for us consumers?

 
With millions of Americans deeply in debt, it is unlikely that our nation’s financial crisis is nearing its end. For the average American family facing an increased cost of living, decreased value of retirement accounts and less available credit in the marketplace, the situation looks pretty bleak.

The report entitled, “Credit Cards at the Tipping Point” supports the idea that the next year will bring a dramatic rise in the already increasing rate of credit card defaults. The report indicates that banks will likely write off as much as $100 billion in bad credit card debt, as 10% of all credit card balances will become uncollectible.

It’s Tougher To Get Credit

As the financial climate in the U.S. has deteriorated, many people have become increasingly reliant on their credit cards. Mortgages, HELOCs, and even car loans now require stellar credit scores (case in point, GMAC Financial Services has announced that they will only write new contracts for customers with credit scores of 700 or higher), as consumers have turned to their plastic to maintain their lifestyles and, in some cases, to cover even the most basic of living expenses.

A large part of this problem was caused by the card issuers themselves. Much as mortgage lenders qualified borrowers for more house than they could truly afford, allowing even the paperboy to own a McMansion, many credit card issuers used techniques such as “fee trapping” (when the company approves a low-limit card with a high interest rate in hopes that the limit will be exceeded and the consumer becomes trapped in a cycle of paying over-limit fees and finance charges) to lure in people with poor credit who might otherwise only qualify for a secured card. Other tactics, such as universal default penalties, shortened grace periods, and increased late fees also helped to put consumers deeper into debt.

The Pendulum Swings

These days, lenders have stopped giving anyone and everyone credit cards, and have gone to a different extreme: freezing balance transfers, reducing lines of credit, and limiting access to other types of consumer credit. These strategies are backfiring. By preventing consumers from rolling over their debts, the industry is forcing its customers into default.

Please don’t misunderstand me — consumers fully share the blame with lenders in this situation. The freewheeling accumulation of excess and its associated debt that preceded the current economic crisis was very much a function of the desire that we Americans have to keep up with and/or outdo our friends and neighbors. We all share that common desire and urge to keep up with the Joneses. As adults, the vast majority of us should have known better when we began signing away our financial futures, but in the excitement of acquiring a brand spanking new, shiny [insert possession here], it never occurred to us that when the bills came due, the access to another line of credit might not be there, much less the money to pay the bill outright.

How Do We Avoid Credit Card Default?

So, now what? If we can’t get credit to cover our credit, how do we avoid default? Pre-financial meltdown, the advice for consumers in a credit card pinch was to refinance their homes to roll in the credit card debt, seek a HELOC to cover it, or to open a new credit account with a 0% rate for balance transfers to buy time to pay it off. With those options off the table, where do consumers go when they can’t pay their credit card bills (aside from bankruptcy court)? Nobody seems to have the answer to that question right now.

There may be a silver lining to the credit debacle our nation faces. With the tightening credit market, we will be forced to be more mindful of the limitations of our net income, rather than the limits on our credit cards. Hopefully the lessons we learn in these trying financial times will be lessons that stick with us, even when the sky clears.