Article by Chris A Smith
Defaults on credit card debt continues to soar and it is about to get worse for the banks issuing the cards. A proposed change in a Federal Accounting Standard could jack up the default rate by a third requiring banks to increase their reserves which in turn would decrease the capital available to lend.
So what does that mean for the consumer?
If you are seriously behind on your credit card bill and you see no way to pay it on a timely basis, now is the time to negotiate a discounted cash settlement. You may be able to save thirty to forty percent of what you owe. It's a good idea to use a non-profit credit counseling service to walk you through the process and develop a plan to pay for the settlement.
Why are the banks eager to close out bad credit card accounts? It has been the practice of most banks to bundle credit card loans and sell them as investment deals. These deals are considered "off the books" and as such do not have to be shown on the bank's balance sheet. In other words they have no impact on the bank's earnings even if the loans go bad. The new accounting rule will change that and eliminate "off the books" deals.
Bank regulations require that a cash reserve be kept to cover bad debt on loans. However, since the off the books investment packages are not included on the bank's balance sheet, there is no requirement to keep a cash reserve for them.
The accounting change will require that off the books loans be placed on the balance sheet and be subject to the requirements of any other loan. What this means is banks will need to greatly increase their cash reserves. To give an idea of how big an impact this will have; American Express says it will have to add billion to its loan balance, Discover billion and Citigroup, a bailout recipient, has to add billion.
That huge influx of new loan liability will require that billions of dollars will have to be set aside as reserves. The fact that at least 10% of those loans are bad has motivated the bank! s to cle an them up as fast as they can. If they can get 0 on a 00 balance, that means they have just saved on the amount of reserve required for a 00 loan. Banks are so motivated to reduce the number of delinquent debt that they are actually calling consumers themselves, not using collection agencies, and offering settlements.
There really is no downside for the consumer. By being late on the payments, the consumer's credit rating is already damaged. If the cash can be put together the consumer can get a significant discount on their debt. However, the time to act is now. Late fees and a default interest rate of 30% are still being applied so why wait.
About the AuthorChris A Smith writes the personal finance and credit industry and has authored informative and useful articles on alternative loans, bankruptcy, credit rebuilding, credit law and much more. Be sure to chek out the video Don't Buy Stuff You Cannot Afford
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