Using Credit Cards During the Financial Crisis

The thought about the credit card industry was that it would survive the subprime mortgage collapse. Keeping aside for the moment that financial institutions have their hands in both the mortgage and credit industry, the thought was that credit card issuers could weather defaults on credit cards. For these reasons:

1. The foreclosure on a house could amount to $100,000 in lost payments for a lender. It’s a rare credit cardholder who’s got $100,000 in debt. For credit card debt, $30,000 is high, but that’s relatively small for a mortgage.

2. Interest rates are obscene for credit cards, as compared to other types of loans. The median APR for credit cards is 20%, which is a ridiculous figure for other types of loans. So credit card companies were once making a killing in interest rates.

The amount of interest on credit cards + the relatively low amount of debt was thought to protect the credit industry. Only that’s not the case anymore: because the credit card industry did something very stupid – in a long line of stupid things leading up to the financial collapse. Even after the subprime meltdown of 2007, the credit card industry packaged together credit card debt and sold it off to investors. This was the same system of packaging bad credit mortgages that led to the mortgage crisis. Not learning from this mistake, and eager for quick money with no long-term viability, the credit card industry did the same. And now they’re finding that no one wants these investments with defaults on the rise.

American Express, for one, has lost 61 percent of its value this year due to defaults. The default rate is on the rise monthly. There was some thought that due to unemployment and less cash on hand that more people would be using credit. This was the theory behind people getting flooded with credit card offers. Credit card companies wanted people to get into debt – and even to default. A default would lead to an even higher interest rate – as much as 32%. But with so many people defaulting, interest payments aren’t making up the difference.

What This Means for People with Credit Cards

What this all means is that you are apt to pay more for your credit card now, even if you have a spotless record paying off your credit card. Most every credit card’s terms and conditions state that the issuer can change the interest rate and fees “at their own discretion.” Translation: they can do it whenever, for whatever reason. And because they’re losing money, they’re more likely to do it to your credit card.

Amex, for example, has recently raised fees for cash advances, late payments, and defaults. You could also see your credit limit suddenly go down – without notification. This could lead to over-the-limit fees if you’re not careful. And if your limit went down, it’s quite possible your over-the-limit fee went up as well.

Also, this could also mean that your rewards program could change right out from under you. The Chase Freedom Card is one such example. It was one of the more generous rewards cards around: 3% cash back where you shopped most often. The rewards program has recently been downgraded to a point-per-dollar system, which is on the bare-bones, low-end of rewards programs.

What this all means is that you should check your credit card’s terms and conditions to make sure that they haven’t changed. If the APR’s gone up, this means using that card less or transferring the card to a card with a long-term low introductory balance transfer rate. All told, this means that during this crisis, interest rates are going to go up for all types of loans. Credit cards are kind of the canary in the coalmine showing just how unhealthy things have gotten.