MacRaven - Dave Haxton's Weblog

Wed, 24 Aug 2005

This is vital economic news - read this now.

Checking over the blogroll tonight I happened across this: Dating the Next Recession over at Moore's Lore. I was appalled - maybe I've been living under a rock, but I had not heard anything about this. Nothing. Zero. Zilch.

On October 1st,2005 the Comptroller of the Currency has mandated that minimum credit card payments go to a 10 year payoff as opposed to the current 20 year payoff. The net effect of this is that it doubles the minimum payment due on any card for which you carry a balance.

As if this weren't obnoxious enough, how about that date, October 1? Coincidence? Here's what About.com has to say about it:

The new bankruptcy law will be in affect October 2005 and the credit industry is keeping the rise of minimum credit card payments as quiet as possible.

And why has it been so "unannounced"? First of all it is very unpopular with the industry's "best customers"... those are the ones so deep into credit card debt that they cannot see the top. Secondly, bottom line profit loss is at stake if these "best customers" can more easily declare bankruptcy and have this debt written off before the new law takes affect.

After nearly two years of unemployment, and starting up a business, I carry large balances on credit cards. I've been making my payments, usually more than the minimum, but certainly not double the minimum. I will be unable to make even the minimum payment if it essentially doubles. And if I hadn't found out about this until October, it would've been much more difficult for me to declare bankruptcy.

But think of the effect this is going to have on the economy! It's estimated that up to 39% of us make minimum payments - and those are going to double. Even if bankruptcy is unavailable as an option, there's going to be a lot of bad debt writeoff's by the banks - a lot. Enough to burst the housing bubble, for sure. And given the fragile state of the economy as a whole, I wonder if "recession" is the right word for what's about to hit us.

Additionally, it's just in time for the Christmas shopping season! American retailers live and die by the 4th quarter of each year - and with payments doubled, how much excess cash is going to be floating around for Santa? This should lead to some really spectacular sales around the holidays, though ... but in this case, that's probably not a good thing.

This cannot be popular with the banks - they've got to know what's coming. How and why this mandate is coming into effect I've not been able to ascertain - but I'm feeling as though I've been sucker punched.

Update: Here's a direct link to the dairy at DailyKos that Dana used: it has much more background.

Update: Apparently this was passed in 2003 by the Comptroller of the Currency - link from Conspiracy Nation. And here's the article Conspiracy Nation cites from Business Week.

Update: I changed the bold banner across the top of this post, deleting the part about being an American and carrying a credit card, as it was a bit misleading. This news will effect everyone irrespective of their card-carrying status or geographic position in the global economy.

/Politics | 5 writebacks | permanent link

On 8/22/2005 17:38:15
NYPaganChick wrote

Credit Card Payments

Wow, that is wild! I will have to link this to all my friends and family who all have credit card debt. Thanks for the info!

On 8/22/2005 22:07:40
Dave H wrote

By all means

pass this news around! I've called or emailed about 25 folks today on this, and out of those, only 1 had heard anything about it. And his mom is a financial planner, so go figure! Even my mortgage banker hadn't a clue ... but was suitably concerned when she grasped the implications. Be well, Dave H.

On 8/24/2005 08:20:19
cskendrick wrote

Thanks for getting the word out

Also, I am very glad to see the value of realtime peer review in action. I intend on putting out a second heads-up -- more a call to action than a warning shout (which, I think, has been done. So, what can people do? Getting the word out just might be enough. That the increase in minimum payments is tied to a ruling by the Executive Branch, rather than an Act of Congress, means that public awareness in this instance has a very strong chance of producing a positive result. I have a feeling that the Bush Administration will be more than happy to do the right thing, once it is made aware of just how many voters (many of them in states that remain very appreciative of his leadership) will be impaired by what I am sure was a well-meaning ruling. "For whom?" remains the question. I mean, a lot of the circa 3 million people (est. 3% of roughly 100MM consumer cardholders in the USA today) are going to be shoved off the financial cliff with no warning. I am of the opinion that the more conscientious (in this instance, self-interested rational-acting) creditors are giving their consumers the heads-up by raising the minimums now -- while bankruptcies are soaring before the October 17 deadline, it is nothing compared to the number of consumers that early warning will save from such a fate -- and retain as debtors in good standing. What's the self-interested angle? Why, rolling persons with large balances and good credit (but, alas, tight cash flow) over to secured debt -- home equity lines for example, which will retain longer (as long as 30-yr) terms of payment (ergo, lower minimums!)..and the banks will be thanked for giving customers what they had before, albeit with a transactions fee, of course. And since such debt is secured, well, the shareholders are going to like it. This is why the big commercial banks have been gobbling up the companies that sell only credit cards..because (a) they can and (b) they can make a lot of money for doing so and (c) be thanked for 'saving' debtors for doing so. Oops. Forgot to mention. If you go this route but retain an adjustable-rate line of credit, you are only delaying the inevitable, and since the debt will be secured by your home or other assets...guess what? It's a goner, if you fold. As for the scope of troubles -- interest rates are going up, which means even more folks are going to go under as a result of carrying adjustale-rate debt of all sorts -- cards, home loans, you name it. It's not a question of if, but of how many. Just fudging around with some numbers, I come up with something on the order of several hundred thousand more bankruptcies for every 1-point increase in the prime rate. In the long run, in a rising-rate environment, everyone's a marginal debtor. Oops.

On 8/24/2005 13:58:54
Noddy wrote

Since I have no credit cards (I gave them up 24 years ago), and the one loan I have is a fixed-rate, I never even looked at this, but I know quite a few people who will be seriously affected by this, some possibly to the point of losing their small businesses. I plan to tell them now so they can make plans.

On 8/24/2005 14:18:17
Dave H wrote

Spread the word..

By all means tell everyone you know about this. But understand: this will not only effect credit card holders who carry a balance - the ripple effect could well be the proverbial straw that breaks the camel's back on our fragile economic recovery. Picture this: 3 million defaults over the next twelve months will, assuming the average balance defaulted is $10,000, will suck $30 billion right out of the banking system. Assume that another 20 million cardholders curtail their spending habits because of this: a "good thing" in theory, but not such a good thing when consumer credit is about the only motivating force behind the economy. Retail sales fall dramatically (especially over the crucial 4th quarter) and manufacturing orders consequently decline. Add to this $3/gal. gasoline, and you have the making of an economic train wreck the likes of which hasn't been seen since the Great Depression. Thanks for the comment, and Be well, Dave H.

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