Tomorrow's crisis: Credit cards
As Joe Nocera pointed out in the December 1 New York Times, credit cards, which are easier to get (and easier to screw up) than mortgages, are headed for the same sort of meltdown. With cardholders facing unemployment or reduced salaries, it seems likely that they will also have problems making their minimum monthly payments. This will probably translate into serious problems for card companies.
In many ways, the excesses of the mortgage market are mirrored in the credit card industry. For example, the tendency of some borrowers to exaggerate their income and downplay their expenditures has been blamed for a large percentage of the bad mortgages out there.By comparison, credit card forms allow applicants to claim household income as a grounds for repayment. Thus, applicants can legally pretend that their roommates' or parents' incomes influence their ability to pay a debt. Furthermore, most of the information on a credit card application is unverified. The applicant can claim any rent or salary that he or she wishes, comfortable in the knowledge that the company will not be able to check it out.
Perhaps the biggest danger lies in the way that the credit card companies' have tried to manipulate their consumers. Using flashy balance-transfer offers to draw customers in, many subsequently raise rates or use a variety of questionable methods to levy fees. Added to this, many companies base credit limits on credit score, which means that some customers find themselves with credit limits that far outstrip their resources. This, in turn, encourages a sort of "Peter Principle" of credit: customers are promoted until they reach their level of insolvency.
Hopefully, credit card companies will recognize that a little leniency goes a long way, especially in the middle of an economic crisis. If you find yourself slipping behind on your credit card payments, try talking to your card issuer. While many take a hard line, some are willing to help you work through your tough times by lowering payments or removing fees. Regardless, it never hurts to ask!
Bruce Watson is a freelance writer, blogger, and all-around cheapskate. He has become a big fan of credit-free living.