Credit Card Changes Hurting Customers

The subprime mortgage crisis was sparked by the uptick in interest rates on adjustable-rate mortgages.  Homeowners suddenly found themselves unable to make higher mortgage payments, and foreclosures soon followed.  The same ugly scenario could repeat itself with credit cards.

Our economy has been bruised and battered after the housing market bust.  It now appears that a new crisis-a credit card market meltdown-may be imminent.

This emerging cause for concern is related to the changes in credit card terms that banks are instituting to protect themselves from future losses.  Credit card companies are increasing interest rates and reducing credit limits at the drop of a hat, causing strapped consumers to scramble to make escalating payments.

Harsh penalties

The fallout from the economic crisis has many credit card companies on the defensive.  They're reviewing all credit card terms, and doing everything to minimize their risk exposure among questionable customers.  If you're late on a payment, for example, you can expect an immediate increase in your interest rate.  

While it may be fair to assess a penalty in the event of a late payment, the reaction by credit card companies is proving too severe for many cardholders.  There have been numerous cases of banks raising rates to 20 percent or higher, which can significantly impact a person's minimum monthly payment if she carries a balance.

Financial crisis, Act II

If those minimum payments skyrocket, another subprime-like financial crisis may be on the horizon.  With the subprime market meltdown, declining home values made re-qualifying for a new home loan impossible.  This pulled the rug out from under people who carried an adjustable-rate mortgage.  Unable to qualify for a new loan, they were forced to make payments on the mortgage with the new higher rate.

The payments proved too high for many homeowners, and their homes fell into foreclosure.  A similar scenario is occurring with credit cards.  Consumers who have household budgets already stretched to the breaking point can't afford significant increases in their monthly credit card payments.

Another drag on the economy

The revision in credit card terms could have drastic long-term consequences for the economy as a whole.  Consumer spending makes up two-thirds of the economy's overall activity.  While incurring excessive debt isn't a solution, neither is scaring shoppers.   If people live in mortal fear of using their credit cards because a spike in their interest rate could ultimately lead to a home foreclosure, then many people will opt to pass on the trip to the shopping mall.

Not all the blame can be levied on credit card companies, which are doing everything they can to keep their heads above water. A more realistic penalty could be used to curb poor money management habits.  It would help consumers in the short run, and aid the economic recovery in the years ahead.