Defaults on credit card debt continues to soar and it is about to get worse for the banks issuing the cards. A proposed change in a Federal Accounting Standard could jack up the default rate by a third requiring banks to increase their reserves which in turn would decrease the capital available to lend.
So what does that mean for the consumer?
If you are seriously behind on your credit card bill and you see no way to pay it on a timely basis, now is the time to negotiate a discounted cash settlement. You may be able to save thirty to forty percent of what you owe. It’s a good idea to use a non-profit credit counseling service to walk you through the process and develop a plan to pay for the settlement.
It is a common practice of banks to bundle credit card loans into an investment vehicle and then sell them on the market. When they do this, they don’t have to show those loans on their balance sheet as they are “off the books” deals. The change in the accounting standard will stop this practice and those loans will have to be shown on the bank’s books.
Banks that are FDIC insured are all regulated. Part of that regulation requires that banks keep a cash reserve equal to a percentage of all loans lent as a reserve against bad debt. Off the books loans were not included on the balance sheet so the banks did not have to have a reserve set aside for them.
Bringing these loans back on the books is going to have a significant impact on the amount of cash a bank needs to cover the reserve. To give you an idea of the magnitude of this rule change, American Express says it will have to add $28 billion in loan liabilities while Citigroup says it will have to add over $98 billion! Didn’t we just bail these guys out?
Billions of dollars will be needed to cover the cash reserve requirement once those new loans are added to the books. Banks know that at least 10% of the loans are bad and the potential for that to go up is very real. The more defaults, the more the reserve needs to be replenished. As a result, banks are motivated to accept settlements for less than the amount owed. In fact some banks are making the first contact with card holders who are behind offering discounted deals.
There really is no downside for the consumer. By being late on the payments, the consumer’s credit rating is already damaged. If the cash can be put together the consumer can get a significant discount on their debt. However, the time to act is now. Late fees and a default interest rate of 30% are still being applied so why wait.
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