Dealing with credit card line cuts

by Sundeep Kothari

Credit Card Cuts

 

This article discusses the reasons for the expected $2 trillion in credit card line cuts and some strategies for how consumers may deal with those cuts.

Credit card lines to be cut by $2 trillion

by Sundeep Kothari

Credit card lines to be cut by $2 trillion

Credit card companies are expected to cut credit lines by $2 trillion over the next 18 months.

This will lead to a sharp drop in consumer spending, which will lead to more trouble for retail businesses, which will lead to retailers laying off workers, which will lead to more foreclosures, which will worsen the economy.

But since banks have no money to lend out, they have no choice.

Proposed new credit card rules

by Sundeep Kothari

Proposed new credit card rules

In May of 2008, the Federal Reserve Board proposed new rules for credit card companies. These include:

1. Banning banks from raising interest rates until a minimum payment is at least 30 days late, a promotional rate is expiring or the customer has a variable rate.

2. Encouraging banks to send statements at least 21 days before the due date.

3. Banning the widespread practice of applying payments to low or no interest balances first, then higher balances.

4. Banning banks from charging over-limit fees if the limit is exceeded because of a hold placed on the account.

These new rules are certainly good, but are not enough. Here is another rule that I support: Reducing the default rate from 31% down to 20% on credit cards. This would have the effect of allowing people to pay down their debts at a faster rate. In addition, individuals will have more money to pay their mortgage payments, which will reduce foreclosures. Also, people will have more money to pay down their student loans, and other personal loans. Instead, when the interest rate is jacked up to the default rate, then many people go ahead and file for bankruptcy. And then banks get nothing in return. By reducing the default rate, banks will have more liquid cash, gain more stability, and the credit market will have some thawing.