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Saturday
Jun212008

Credit Card Crisis Looming

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Credit Cards

- it had to happen - credit card companies are reducing credit limits - often without warning.

Cards like Visa, MasterCard and American Express Company, are slashing back credit card limits. They are targeting clients with unsustainable large credit card debt and those that live in areas hit by the sub-prime mortgage crisis - like California, Arizona and Florida, where home prices have plummeted.
Self-employed entrepreneurs or those working in threatened industries are also in their sights.


You don't have to be Einstein to see what caused this - the weak American economy, the sub-prime mortgage scandal (yes, a scandal), rising American unemployment, the unsustainable Iraq invasion (note I don't call it a "war") and people living beyond their means propped up with credit cards and PayDay loans.

A big part of the problem is that people are using credit cards for household expenses like groceries, petrol and rent. While still lashing out on entertainment and luxury items. And to prop up the credit card debt they are taking out home equity loans. In 2007 half of all those who took out these kind of loans used the money to help reduce their credit card debt. The figures for this year will be even higher. But home equity loans are now not so easy to get.

Credit Card industry experts predict that credit card loss rates for lenders, now around 5.7 percent, could go as high as 10 percent in the next 18 months. Others are saying that 40-45% of oustanding credit lines will be slashed in the next two years - $2 trillion worth.

BTW disclaimers in the fine print of credit card applications pretty much give the credit providers carte blanche - they can cancel or alter credit limits any time, irrespective of a client's payment or credit history.

Credit Card Eye-Opening Facts

  • In 1970 51% of Americans had a credit card. Today it's 93% today. The average cardholder has 7 cards.
  • Americans owe $850 billion in credit card debt.
  • A "preferred customer", according to credit card companies, is someone with a "taste for credit" who's willing to make minimum monthly payments—forever. Come on down sucker!
  • 60% of Americans have been in credit card debt for more than a year. 60%.
  • The average American household owes nearly $10,000 on credit cards - on a card with a 14% apr (the average interest rate) and making 2% monthly payments, it would take you more than 6 years to pay off that debt. And you'll pay $4,000 in interest.
  • The average American household spends 14% of its disposable income paying off debts. And puts negative 0.5% into savings. Uh-oh.
  • Americans charged $51 billion worth of fast food last year - a 29% increase since 2001.
  • 1/3 of low- and middle-income households report going into credit card debt to pay for rent, utilities, and food.

I daresay the British and Australian figures would be similar.

You think there might be a Credit Card Crisis Looming?

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