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The coming US credit card crisis: How to survive

December 30, 2008 13:15 IST

While the economy tumbles and the government rushes to help stop the housing crisis, another danger is lurking--in your wallet.

Credit cards are shaping up to be the next chapter in the financial meltdown, promising to stymie consumer spending, drag on the economy and force a whole new wave of financial difficulty on Americans.

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  • On Monday, Capital One disclosed rising delinquencies and loan losses for the month of November because of unemployment and the weakening economy. Loans at least 30 days past due made up an annualized 4.7% of the portfolio, up from 4.48% in October and loans charged-off rose to an annualized 6.98% from 6.54% in October.

    To combat the risks, major lenders like Bank of America, Citigroup and American Express are raising rates on existing balances and slashing credit lines.

    Meredith Whitney, an analyst at Oppenheimer & Co., estimates banks will cancel $2 trillion of available consumer credit over the next year.

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  • There are some things you can do to help yourself. Experts advise reading the terms and conditions on your account statement every month, so you can pick up on any unexpected changes your card company slips into the fine print.

    Also critical: maintaining your credit rating at its current level, giving card issuers less ammunition to change your account terms.

    Another tip: Make sure you don't use too much of your credit limit. Use no more than 30% to 40% of your available credit on one card and across all your cards. Going past that threshold is a trigger lenders to change terms. It can also dent your credit rating.

    The government is acting as well. The Federal Reserve, along with the Office of Thrift Supervision and the National Credit Union Administration, are expected to publish new rules that could have a dramatic effect on credit card lending and consumers' access to credit.

    Among other things, the new rules will prevent card lenders from jacking up interest rates on existing balances, a controversial practice that consumer advocates have long spoken out against.

    Banks fought the new rule vigorously, saying they need to continually adjust to the changing risk profiles of their portfolios and raising rates on delinquent accounts helps cover the costs of greater risk of default (not to mention it soothes investors in the securitized pools of credit card loans the industry uses to help fund itself).

    But after more than 50,000 comments from individuals, consumer groups, banks and others, the Fed will put a stop to it. The American Bankers Association, putting a positive spin on things, calls the new rules "an unprecedented level of protection at a crucial time for consumers."

    While banks can raise rates for future balances, the new rules, which aren't expected to take effect until 2010, won't allow them in most circumstance to increase the rates consumers pay on existing balances.

    The rules also prohibit banks from raising rates when a customer falls behind on other bills, say a utility payment, not related to their card account.

    Card companies will have to give consumers 45 days notice of any interest rate changes, up from the 15-day notice period currently in force, and give them more time to make payments. The new rules also make improvements to disclosures by card companies.

    All of this is going to be costly to the card industry, which is already seeing declining profits. And that means there won't be as much lending to go around.

    The Federal Reserve estimates credit lines could be cut by an average of $2,029 per account, an industry-wide reduction of $981 billion. Tighter credit standards could put credit cards out of reach for 45 million consumers, the Fed says.

    Liz Moyer, Forbes.com
    Source: