You know why I can’t settle in to a comfortable optimism about the stock market?
Because the financial system is so complicated that just when the best and the brightest think they’ve got it all figured out, reality bites them hard.
Here’s an example. We all know, some of us from personal experience, that banks have found the true religion now when it comes to credit card lending. They’re busy cutting credit limits, raising credit standards, tightening payment deadlines.
All the stuff they should have done before the financial system’s near collapse.
That’s had the effect of cutting the amount of consumer debt. Add in the efforts to consumers to pay off their balances and it’s no wonder that the amount of credit card debt has fallen every month since February. (And if you don’t think that’s a big deal, the February drop was the first in the 40 years that the Federal Reserve has tracked this data.)
But, perversely, while the total amount of credit card debt is falling, the proportion of card holders who have fallen into the most risky subprime category has climbed as a percentage of the whole. These accounts have been dinged by falling credit scores, rising balances, and increasing numbers of late payments.
It’s not hard to figure out why. The folks who can pay down debt are paying down debt. That’s why the total is falling. But those folks who don’t have the money (Ya think maybe because they don’t have jobs?) to reduce their balances, and are indeed so stressed that they’re now in danger of falling into deliquency on their accounts.
Which is quite a problem for the banks. They’ve got less debt from their best customers–the folks who can afford to pay and who are less of a risk–and they’ve got more debt from their worst customers–the folks who can’t afford to pay.Â
That can’t be good for the bottom line. Tune in next quarter to see what that does to bank reserves for loan losses.
I’m not old, but I am old fashioned. For me “religiously pay all my cards on-time” means paying off all the outstanding debt. At today’s rates one is at a minimum paying 10% to be able to spend more than they make. The banks don’t want you to pay it off, they want to gouge you on your revolving credit.
Where else can one get a guaranteed return? Smart finanical planning would have you paying off your credit card debt monthly, living within your means, and in an emergency tapping into a emergency fund that you have created, and avoiding the pitfalls of revolving credit. Minimum payment is their game. Pay it all off, every month, religiously.
On my Barclay’s card, the credit limit was reduced from $20k to just above the then-current balance of $3300. So I went from having a 15% credit usage rating to a 95% credit usage rating. Likewise, on Capital One, they reduced it from $13K to my then-balance of $6500 — which took me from 50% usage to 95% again. Then my FICO score gets dinged and my interest rate goes up as a result, which increases profits to the CC companies. Since I religiously pay all my cards on-time and always pay considerably more than the minimum, I’m assuming these artifically increased credit usage ratios aren’t putting me into the “risky subprime category” — but I’m sure I’m in a lower category of customer desirability, despite my ongoing 6-figure income. So it seems to me that some of the “proportion of cardholders who have fallen…” include folks like me who are still employed and paying their bills. We just don’t look as good as we used to….
One more reason their exposure is increasing. When US Bank reduced my credit limit twice without notifing me, I cancelled their card. Now they have to find sumeone with a sub 800 credit score to maintain their profits. Too many good deals for people with good credit to play these kind of games. Of course they also lose a 20 year customer. Much the same senerio as Washington Mutual prior to it’s failure.