The Next Economic Crisis?
Nov 23rd, 2008 by RSmitty
It is widely assumed that the consumer credit card industry will be the next economic shoe to fall. In an attempt to avert another bailout, I was wondering what could be done by the affected companies, consumers, or both, to avoid, or at least significantly soften, this oncoming blow. This is what I think could temporarily help the consumer and the industry enough in the short term until a more viable environement evolves.
Allow consumers to enter into a short period of interest-only payments, with conditions, as follows:
- Consumer can agree to three-, six-, 12-month programs
- Terms of account are frozen in place for this period (company can not change rates, except in cases of normal terms of spread + prime (or LIBOR).
- Credit line remains in place (but suspended for use) for this period
- Is NOT reportable as negative to credit bureaus
- Failure to pay on time by consumer unfreezes this program and subjects consumer to normal actions by company.
My thoughts on this come from what will likely be consumers’ inability to pay a full minimum payment. In many cases, an interest-only payment is affordable. If the companies allow this approach, they still get the profit paid to them, the consumer avoids negative credit reporting, and both the consumer and company lay the groundwork for future business with each other.
During this period, the consumer needs trust from the company to not adversely affect their obviously tenuous financial situation, by not raising rates based on anything other than fluctuations in the prime or LIBOR rate. They also can not close down the credit line during this period of interest-only payments. If the consumer has gone totally-ugly on their other credit accounts, that can be an exception, but going into an interest-only agreement would not be grounds to close the account’s credit line down. Suspending the line should be expected, though (more on that below).
The company needs trust from the consumer to continue to keep their account current, which can be made by the interest-only program and its conditions. The company also should be able to have an expectation that the consumer can not take advantage (in a malicious way) of this by charging up the account balance. That is the reason for the suspension of credit. Additionally, although the company is receiving interest-only payment, they are being paid pure profit without having to provide additional credit via consumer purchases. In light of this, the company does NOT have the ability to report this consumer negatively to the credit bureaus.
Both parties, however, need their own restraint in this program. The consumer does not have access to their credit line during this period. They are effectively being given a chance to not have their life dictated by bad credit. This is a chance via an opportunity that really should not exist. The companies, however, have shown that they, too, need to be kept in check in these moments of opportunity. An interest-only payment does not allow the comapanies to permit the consumers to continue to charge and pile up their balance. That would only continue the vicious cycle that got all of us here today.
That was my thought over the weekend. What are yours (on this or your own program)?
Credit card banks and their investors should be left to twist slowly in the wind. The current lenders should be liquidated and, if the market still demands credit cards, new lenders can emerge who know how to price and manage risk competently. Consumers who can’t pay or can’t cut a deal can declare bankruptcy. Everybody can start paying cash again. Unlike autos, credit cards are not a strategic industry.
Noman, that crossed my mind, too, but, believe it or not, I don’t think society could possibly go back to a cash-only society. I sincerely think we (all of society) are too dependent on a consume-now, pay-later (CREDIT) existence. What happened to lay away (pay now, consumer later – when paid off)? My wife and I tried to do that at two big retailers already for Christmas for our kids’ gifts and we were told both places that they don’t do that anymore.
Er…hello?
Seriously, I think this society is far too addicted on instant gratification (and pay later, if at all) to go cash-only. My focus is like having all your problems in a box and what can you do with those problems to make them work and be productive.
I don’t dismiss your response, though. I’d just like to see if all sides could figure out how to be responsible before the reset button gets pushed.
The credit card industry has been almost as irresponsible as many of its customers. I agree that if they want to keep making money then they can’t go up on the rates of the majority who are paying their bills.. Interest rates are going down. Just staying the same will make them more money.
It takes how long to break an addiction? I think after something like one month to 6 weeks most habbits can be broken.
I am probably over the top anti-credit card debt, so this time I basically agree with noman. I think that a physical exchange of cash is probably the best way to keep people responsible. However I think that with debit cards, check cards, and pre-paid cards people can still avoid small item consumer debt without needing physical cash.
The credit card companies would have us believe that there are a lot of ‘roaches’ who do not pay their bill. How many were enticed into getting in debt on the basis of solicitations from the companies involved?
The bloodsuckers are into a game of gouging the paying customers who will never go into collection. Miss a couple of payments (as a result of oversight rather than an inabilty or unwillingness to pay) in a 12 month period and find yourself paying 34% interest. This helps to pay for bigger mistakes and allows fat bonus payments to the executives. Naturally, the politicians who serve the interests of these institutions can expect big donations to maintain their offices.
Perhaps a blend of conservatism, libertarianism, and populism would prove attractive to the electorate. Some silk-stocking elitists might have other ideas.