Preparing For the Next Economic Crisis - Credit Cards
November 18th, 2008 Posted in Market Analysis
While the United States is still struggling with the mortgage disaster, consumers should look ahead for another economic crisis: credit cards. At the end of last year, U.S. consumers owed more than $961 billion in credit card debt. Although not as large as the $11 trillion mortgage market, but it’s still a lot of lost cash. Now the credit card companies are starting to feel the consequences of the huge lines of credit they have been allowing. The situation is almost the same as the housing crisis, in which people have been taking on mortgages they can’t afford; Americans have been borrowing more money than they can pay back.
In order to avoid further losses, the credit card companies are going to start raising the standards of who they loan money to and how consumer pays them back. It may seem just as easy to get a credit card today as it was yesterday, but the terms and how much you can extend your credit limit are probably going to be stricter. Furthermore, there will be more serious consequences for missing a payment. Some lenders are lowering credit limits or hiking up interest rates after just one missed payment. When credit scoring companies, such as Fair Isaac Corp. (FICO) see these negative shifts in consumer credit, their credit scores will probably go down. The credit score is going to matter more now than it ever did before to get a good deal on a loan. Still, the measures may fall short in containing a growing area of stress on credit card issuers’ sheets that some experts say could rival the sub-prime crisis.
The latest economic crisis, which began with a collapse in the U.S. housing market undermining major financial institutions, have showed further signs of hitting industry and retail. And now it is spreading to the European and Asian markets as well. The world wide economic recession could last longer than feared, reflecting a generally darker view now permeating markets. However, all signs are indicating that the U.S. may emerge much faster from the recession than the rest of the world. As details of the U.S. Treasury’s latest initiative to revive consumer lending emerge, hopes are growing that government help will revive the asset-backed securities market by boosting liquidity and bolstering confidence.
Meanwhile the outlook for the holiday season, which is emerging as a major test for the market, is discouraging. Consumers are growing more frugal and analysts are predicting the worst Christmas sales in nearly 20 years. If any lessons have been learned, it’s that credit cards are not smart emergency funds.
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