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Old 11-26-2008, 08:34 PM   #1 (permalink)
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On deck: The Credit Card Crisis

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View: The Worst Is Yet To Come: Anonymous Banker Weighs In On The Coming Credit Card Debacle
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The Worst Is Yet To Come: Anonymous Banker Weighs In On The Coming Credit Card Debacle
November 25, 2008, 9:00 am
The Worst Is Yet To Come: Anonymous Banker Weighs In On The Coming Credit Card Debacle
By Joe Nocera
A few weeks ago, I published an e-mail message sent to me from an executive who works in the banking industry — and had become disgusted by what he sees all around him. This weekend, that same banker sent me another e-mail message, which he has also agree to let me publish. It’s another wake-up call. Too bad nobody is listening.

Today, we are bailing out the banks because of their greedy and deceptive lending practices in the mortgage industry. But this is just the tip of the iceberg. More is coming, I’m sorry to say. Layoffs are being announced nationwide in the tens of thousands. As people begin to lose their jobs, they will not be able to pay their credit card bills either. And the banks will be back for more handouts.

I received a catalog today from Casual Living and in big bold print on the front page, it said “BUY NOW, PAY NOTHING”. Then in significantly smaller print underneath, it said, (until April). That mantra has been sung throughout the credit markets over the last 10 years. The banks waive a carrot in front of the consumer and reel them in and encourage them to go deeper and deeper into debt. They do this by prescreening customers through credit reporting agencies, mailing offers to apply, and to transfer balances at teaser rates or zero percent financing. They base it on credit score and not on capacity to repay. A good credit score does not equate to the ability to repay debt.

Over my career, I have seen thousands of consumers that have credit card lines in excess of their annual salaries. Some are sinking under their burden. Some have been fiscally responsible and have minimal amounts outstanding. My 21-year-old daughter, who’s in college, gets pre-approved offers all the time. She has no ability to repay debt, yet the offers flow in just the same. We all know how these lines are accumulated. The banks, in their infinite stupidity, keep upping credit lines because the customer pays the minimum payments on time. My daughter’s credit line started at $1,000 and has been increased over the last two years to $4,400. She has no increased earnings to support this. But the banks do it without asking. And without being asked. The banks reel in the consumer, charge interest rates higher than those charged by the mob, increase lines without the consumer asking and without their consent, and lure them into overextending. And we can count on the banks to act surprised when they aren’t paid back. Shame on them.

As a banker, let me describe what we do wrong when we accept and review an application for a credit card. First, we don’t verify income. The first ‘C’ of credit: Capacity to repay, is completely ignored by the banks, just as it was in when they approved subprime mortgages. Then we ask for “household income” — as if other parties in the household could be held responsible for that debt. They cannot. And since we don’t ask for any proof of income, the customer can throw out any number they think will work for them. Then we ask if they rent or own and how much they pay. If their name is not on the mortgage, they can state zero. If they pay $1,000 in rent, they can say $500. (Years ago we asked for a copy of the lease to verify this number.) And finally, we don’t ask how much of a credit line the consumer is looking for. The banker can’t even put that amount into the system. There isn’t any place on the application for that information. We simply put unverified information into a mindless computer and the computer gets the person’s credit score and grants them the biggest line that score and income (ha!) qualifies for.

I recently had a client apply for a credit card. She is a homemaker, with no personal income. The house she lives in is in her husband’s name. She would have asked for a $3,000 credit line, just to pay miscellaneous expenses and to establish some credit on her own. So the computer is told that her household income is $150,000; her mortgage/rent payment is zero. The fact is that her husband’s mortgage payment is $7,000 a month (which he got with a no income verification loan). She had a good credit score, but limited credit since she has only lived in this country for the last three years. The system gave her an approval for a $26,000 line of credit!

This has got to stop. People are going to be learning hard lessons over the next years. It would help, though, if the banks could change their behavior now, before things get any worse. Tomorrow is already too late.

In 2003, Congress passed the Fair and Accurate Credit Transactions Act of 2003. This law was implemented through regulations issued by the Federal Trade Commission in consultation with the federal banking and credit union agencies. It requires all credit card and insurance solicitations to include a disclosure for “prescreened offers.” We are all familiar with them. They are the dozens of credit card offers that are sent, unsolicited, to consumers, usually by mail. The law allows the consumer to opt out of receiving prescreened offers by calling an 800-number.

I think Congress did this backwards. Perhaps it could amend the law. The regulation should have required the consumer to opt in, if they so desire, instead of opting out. That would mean that no one would get an unsolicited credit card offer. If a consumer needs a credit card he or she could be given an option to call an 800-number to opt in. Or the consumer could go to their local bank and apply for a credit card in person. Or the consumer could go online and apply for a credit card. The consumer can also view all the best credit cards, nationally, at bankrate.com. Bankrate.com is an invaluable tool for consumers.

Some other benefits: (1) It would halt the message being sent that credit is free and perhaps limit irresponsible accumulation of credit lines. (2) It would force the banks to become more competitive in their rates. The consumer is going to need a break and they will need it soon. And credit card rates, which are quite often above 22 percent, is piracy. (3) Eliminating mass mailings would save a lot of trees.

I’ve been reviewing many of the banks annual reports over the last month and there is no question that the default rates are on the rise. If Congress doesn’t act today, the bankers will have their hats in their hand before we know it, and doing another a tap dance before the Senate Banking Committee, and asking to be bailed out once again with our tax dollars. Sad, but true.
There were many things that I watched in awe over the past decade... so far all of them have come to pass, save this last piece.

The banks loaned out money for mortgages, yes, they were subprime, but they had assets attached to them. The credit card industry.... not so much. What can they buy back? What can they repossess? What do they own? NOTHING.

If you thought that the slicing and dicing of subprime mortgages was bad... you've got the same kind of idea going on with credit card lending.

The bankers learned from the mob just how to make money.... make them loans and keep the juice running. Teaser rates at no interest, up the limit even though they know the capacity to pay isn't there.

Indentured servitude to a bank, an entity that has all the trappings of a coporeal body but none of the limitations.

So now that people are losing their jobs, people are getting laid off.... companies are announcing layoffs... what do you think will happen next? People will not be able to pay off their credit cards. They will default on them. And who pays for that default?

Vegas has some very strict rules in place....chips on the floor must be backed by actual money in a vault. We don't seem to have that same kind of belief any longer...
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Old 11-26-2008, 08:56 PM   #2 (permalink)
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Unfortunately, I live on credit cards. There is simply no way to afford doctor co-pays, car insurance, dental work, etc. now. I figure our monthly outlay is about $600. I know it's a trap-can't afford even essentials, charge them, pay less than what was charged, charge again, rinse, repeat.

The banks are pretty savvy; No sooner do you make the first payment on a new card then they raise the limit. "OOO, they can afford to pay us $200 a month! Raise it again!" But that new card doesn't have any interest accruing; by the time it does, you're in it deep and that $200 put on it each month now equals maybe $90. Gotcha!

Now, here's the beauty of it: Credit scores are determined by timeliness of payment and debt to credit ratio. So, if you have a credit card with a $26k limit but only use $3k of it and pay, say $200 a month, you look great. If you have that same $26k, use it to its max but only pay bare minimum and sometimes it's a day or two late, your credit score takes a dive.
Nothing about income, nothing about debt to salary ratio. That'll come later when you get a mortgage and as long as you can afford to pay 30% of what you make, no problem.

I make $15k a year, have $23k in debt and my credit score is, as I was told, "excellent". Why? Because while the cards are in my name, my spouse makes the major salary and I pay each card (3 right now) $200 a pop each month. They don't care that it's not my money paying them; they wouldn't even care if I used card A to pay card B, long as it's done on time.

It's a 3 card monty and I keep plunking down another Jackson....
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Old 11-27-2008, 12:51 AM   #3 (permalink)
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I got rid of all my credit card debt two years ago. The little I had remaining at that time I consolidated into a prime +1 line of credit (which I paid off).

I now have two cards that I use every month to pay bills, etc. but I pay the full balance off at the end of every month. If the balance is higher than planned, I do without for the next month.

I was never happier than to rid my back of that particular monkey.

The only remaining debt is my mortgage.
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Old 11-27-2008, 01:00 PM   #4 (permalink)
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You know, it's scary but true that the people who are the best off in all this mess, the ones that made the most money off other people, are still the ones orchestrating this increased credit concept, like it will somehow stimulate the economy. It will, no doubt, but when all those bills come due and there's no money to pay them, it's mayhem all over again. And those who made money in the past will make even more, and the bailouts will happen again.

I live in Canada, and our government wants us all to believe that it's not as bad here as it is south of the border, but it's all a pipe dream, and we're all screwed because a bunch of people are making a lot of moeny watching everythng else collapse around them.

It's pretty perverted really, and I'm scared, and more than a bit angry. I was laid off at the beginning of Nov., and let me tell you, it's a sorry state of affairs out there.

Stimulate yes, buut let's stop making credit more available, especially to those who can't afford it, it will only make things worse in the long run.

Peace,

Pierre
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Old 11-27-2008, 02:48 PM   #5 (permalink)
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Quote:
Originally Posted by ngdawg View Post
Unfortunately, I live on credit cards. There is simply no way to afford doctor co-pays, car insurance, dental work, etc. now. I figure our monthly outlay is about $600. I know it's a trap-can't afford even essentials, charge them, pay less than what was charged, charge again, rinse, repeat.

The banks are pretty savvy; No sooner do you make the first payment on a new card then they raise the limit. "OOO, they can afford to pay us $200 a month! Raise it again!" But that new card doesn't have any interest accruing; by the time it does, you're in it deep and that $200 put on it each month now equals maybe $90. Gotcha!

Now, here's the beauty of it: Credit scores are determined by timeliness of payment and debt to credit ratio. So, if you have a credit card with a $26k limit but only use $3k of it and pay, say $200 a month, you look great. If you have that same $26k, use it to its max but only pay bare minimum and sometimes it's a day or two late, your credit score takes a dive.
Nothing about income, nothing about debt to salary ratio. That'll come later when you get a mortgage and as long as you can afford to pay 30% of what you make, no problem.

I make $15k a year, have $23k in debt and my credit score is, as I was told, "excellent". Why? Because while the cards are in my name, my spouse makes the major salary and I pay each card (3 right now) $200 a pop each month. They don't care that it's not my money paying them; they wouldn't even care if I used card A to pay card B, long as it's done on time.

It's a 3 card monty and I keep plunking down another Jackson....

I've had guys (and one gal) in the industry tell me credit ratios matter even on cards. Don't know, really don't care.

I think your dead right it's a shell game and once you're in it it's a bitch to get out. I feel many people will not survive this financially. All the stuff you mention sounds like reasonable "needs," dental work, medical co-pays, insurance. But I know people who have dug this type of hole on "needs" that include vacations (too stressed, better head to Vegas, VEGAS BABY!), new surround sound (neighbors got the new Bose system, 5.1 Dolby man... awesome!), can't have the new surround sound without a new 42in. LCD HDTV (Am I right, am I right? That's right! Sony Bravia LCD HDTV, full 1080p dude!) and yadda, yadda, yadda until they're 25K+ in credit card debt and can barely afford the minimum amount each month. Then the house of cards starts to fall. They miss a payment, late fee time! Couple late fees and the bank ups the interest rate. Before they know it the amount due on the CC's more then both their car payments each month and they're only paying the minimum, which of course means all they're ever paying is the interest each month.

It's like that old song-

You load sixteen tons, what do ya get?
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store


So far all this consumerism has been a pretty sweet deal for the lenders. They've been able to administrate this whacked out game and the default rate has actually been rather low. Why? Because for the most part people have been able to find employment (not to mention the latest bankruptcy laws went their way) and have been able to keep paying their souls to the company store. Now that unemployment is starting to snowball the card house is tilting to fall on them. Fewer and fewer of their customers are able to pay those minimum payments. As the number snowballs the banks gravy train grinds to a halt. At some point, between the whack job mortgages and the insane credit limit cards, without a tax payer funded bailout the train runs backwards.

There's an old expression that basically says if you owe the bank a little the bank owns you. Owe the bank a lot and you own the bank. Well the tax payers owe the bank a shit load at this point. Now the transfer of ownership is beginning, IMHO. We're bailing out the banks and hopefully we're going to get something for all our cash (more like our children's, children's cash at this point, but that's another issue.) My guess is based on the way I've seen government work in the past we'll be getting pennies for our dollars.

Sure hope I'm wrong about that.
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Old 11-27-2008, 04:54 PM   #6 (permalink)
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I've been thinking about this and I like the analogy that the banks and credit agencies have learned well from the Mob. As long as you keep offering more credit (i.e. debt) you will have people on the hook for the long haul.

But how long will this house of cards stay up if people start to default on their credit cards en masse. As someone pointed out above, at least with a mortgage the lender has the house as collateral (regardless of the depreciated value). With credit cards... not so much.

Again, this is one of those situations where the industry and the consumers need to take their share of the blame.
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Old 11-30-2008, 09:32 PM   #7 (permalink)
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Originally Posted by Charlatan View Post
I got rid of all my credit card debt two years ago. The little I had remaining at that time I consolidated into a prime +1 line of credit (which I paid off).

I now have two cards that I use every month to pay bills, etc. but I pay the full balance off at the end of every month. If the balance is higher than planned, I do without for the next month.

I was never happier than to rid my back of that particular monkey.

The only remaining debt is my mortgage.
I'm like this - I haven't had a credit card for close to 15 years. I have 2 cards - an Amex charge card, which you have to pay off in full each month and a visa debit card (i.e. money in my bank account with a visa symbol on it). Really my only debt is the house mortgage. Happy times.

Having said that, I get a large number of 'pre-approved' credit card applications in the mail, all of which go straight in the bin.
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Old 11-30-2008, 10:06 PM   #8 (permalink)
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Between my husband and I, we have 5 credit cards. We owe nothing. We were planning on getting rid of the redundant cards when we were married, but we haven't bothered yet. The balance is paid off each month for all of our cards. We only spend what we have. I could see this being a problem for others but less for us.
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Old 12-01-2008, 03:20 AM   #9 (permalink)
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Originally Posted by genuinegirly View Post
Between my husband and I, we have 5 credit cards. We owe nothing. We were planning on getting rid of the redundant cards when we were married, but we haven't bothered yet. The balance is paid off each month for all of our cards. We only spend what we have. I could see this being a problem for others but less for us.
I've been told closing out cards can lower your credit score. Might want to check into that, esp. if the cards have no annual fee. I have two cards I use. I travel a lot and seems one will eventually be denied. Can't tell you how many times I've had to call the bank and tell them "yes, I made those charges in ______." So I keep a back-up. Hard to rent a car without one. I also have three or four other cards that I keep in a lock box at home. They're fee free but have a high interest rates. Had them for years, I've never bothered to close them out but they have -0- balances. On the two I use I never keep any balance longer then 30 days usually.

Here's a site that has some advice on closing accounts-

http://content.truecredit.com/Learni...gAccounts.page
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Old 12-01-2008, 05:21 AM   #10 (permalink)
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Yes, be careful about closing cards, especially if you've had them for a while. I paid and closed a Mastercard I had used for 10 years about 6 months before purchasing a new home. My credit score dropped like 20 points. I was told it was twofold, less available credit, and the length of time I had a good credit rating with them no longer *counted* towards my score.

And yeah, me and the wife have some CC debt, but things are starting to turn around, and I should be able to double up on the payments here soon. I suppose we'll always have some CC debt, but it's keeping it at a low level is the key.
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