Why People Who Pay on Time Pay for Credit Card Defaults

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In defense of the credit card companies, one of the reasons that they charge such high interest rates is because of the number of people who fail to pay what they owe on their credit cards. Sure they are profit driven but hey, this is a capitalist society isn’t?

But the fact of the matter is that those people that carry balances from month to month are charged higher interest rates because so many others default on their credit cards. Which in effect, places the responsibility of paying for those who default on those who pay.

An appropriate analogy would be automobile insurance. The insurance companies charge higher rates in part to make up for the billions and billions of dollars in damage caused by uninsured motorists.

The common denominator here being that the responsible are forced to pay for the irresponsible. Now I realize that it is not a very popular position to side with credit card companies and insurance companies but the facts are the facts regardless.

Right now American consumers owe nearly $1 trillion in credit card debt. Approximately 50% of credit card account holders that carry balances from month to month make only the minimum payment. That shows you what a rather tenuous financial position so many Americans find themselves in.

While these accounts are extremely profitable for the credit card issuers, anytime there is a default (which is defined as a failure to make payment after 60 days) the credit card companies are out that money.

And of course, because they are a business that must stay solvent and profitable they pass those costs on to the consumer.  These defaults or write-offs are now happening at a record pace due to the high unemployment rate.

Individual bankruptcies for example, are up 36% for the first half of 2009 as compared to the first half of 2008. That is a stunning increase and has resulted in banks and credit card companies severely tightening their credit standards. Right now in order to be approved for a credit card you pretty much have to have a stellar credit rating.

Bank of America reported that their default rate rose to 13.8% in June of 2009. That is up from 12.5% in the prior month. Bank of America has been hit the worst as far as credit card defaults go because they were the most aggressive and issuing credit cards to quite frankly, people that never should have got them to begin with.

The other major credit card issuers including Chase, Citigroup, American Express, Discover and Capital One all report credit card defaults around the 10% mark. On the positive side there are signs that the economy is improving, but until we see the unemployment numbers go down the defaults will continue.

 

Posted On:  June 5, 2016
Posted By:  admin
Posted In:  Credit Card