As the credit crisis worsens, many people are starting to fear that the next financial crisis will involve the credit card industry. Over the last ten years the credit card default rate has been at the 5% level. By the end of 2009 some analysts are predicting that the charge off rate will double to 10%.
Due to skyrocketing charge-offs, credit card companies are forced to increase rates. Recently, Citigroup was forced to lay off 10,000 workers and raise interest rates for over 50 million card holders.
Although, some argue that the industry is going to be the next crisis, there are others that would argue otherwise. Even if the default rate goes up, others will still be able to pay their payment in full. Very few people pay off their mortgage at the end of the month.
The other argument is that the mortgage business is a 14 trillion dollar industry, while the credit card industry is a 970 billion dollar industry. As the saying goes, you have to compare apples with apples.
The other major most important factor that favors the future of the credit card industry is the fact that nobody is placing bets on whether or not people will be able to pay their bills. In reality, the mortgage crisis was caused by something that is known as a credit default swap. Prior to the great depression, people used to bet whether or not the stock market was going to do good or bad on any given day. A credit default swap is very similar in that an investor buys a credit default swap from a creditor, and is essentially making an investment on whether or not that debtor will pay or not. If the debtor does not pay than the creditor has to pay the credit default swap holder. However, if the debtor pays his debt in full than the bank collects fees back from the investor that purchased a default swap against certain loans. The banks were selling credit default swaps to investors unaware that so many people would end up defaulting on their loans. Therefore, the banks would now get stuck with property, plus they had to pay out to investors the value of the default swaps. Credit card debt is not wagered against like this.
Another very important factor to consider is that credit card companies are more flexible with their billing abilities than the mortgage business. To start credit card companies charge annual fees on top of late fees, etc. In addition, the credit card industry charges more interest than what you pay on your mortgage.
Overall, I think America as a whole will survive the 2008 financial crisis. We are the backbone of industry and the creators of some of the most innovative concepts of modern times. In all the United States has proven that it can withstand just about anything. We withstood and triumphed over foreign occupation when we were a young country. We also lasted through the Civil War and we are still here after the 1929 stock market crash and the Great Depression that followed. Therefore, I am quite confident that the credit card industry which started in the United States will survive one of the most trying times of our history.
Due to skyrocketing charge-offs, credit card companies are forced to increase rates. Recently, Citigroup was forced to lay off 10,000 workers and raise interest rates for over 50 million card holders.
Although, some argue that the industry is going to be the next crisis, there are others that would argue otherwise. Even if the default rate goes up, others will still be able to pay their payment in full. Very few people pay off their mortgage at the end of the month.
The other argument is that the mortgage business is a 14 trillion dollar industry, while the credit card industry is a 970 billion dollar industry. As the saying goes, you have to compare apples with apples.
The other major most important factor that favors the future of the credit card industry is the fact that nobody is placing bets on whether or not people will be able to pay their bills. In reality, the mortgage crisis was caused by something that is known as a credit default swap. Prior to the great depression, people used to bet whether or not the stock market was going to do good or bad on any given day. A credit default swap is very similar in that an investor buys a credit default swap from a creditor, and is essentially making an investment on whether or not that debtor will pay or not. If the debtor does not pay than the creditor has to pay the credit default swap holder. However, if the debtor pays his debt in full than the bank collects fees back from the investor that purchased a default swap against certain loans. The banks were selling credit default swaps to investors unaware that so many people would end up defaulting on their loans. Therefore, the banks would now get stuck with property, plus they had to pay out to investors the value of the default swaps. Credit card debt is not wagered against like this.
Another very important factor to consider is that credit card companies are more flexible with their billing abilities than the mortgage business. To start credit card companies charge annual fees on top of late fees, etc. In addition, the credit card industry charges more interest than what you pay on your mortgage.
Overall, I think America as a whole will survive the 2008 financial crisis. We are the backbone of industry and the creators of some of the most innovative concepts of modern times. In all the United States has proven that it can withstand just about anything. We withstood and triumphed over foreign occupation when we were a young country. We also lasted through the Civil War and we are still here after the 1929 stock market crash and the Great Depression that followed. Therefore, I am quite confident that the credit card industry which started in the United States will survive one of the most trying times of our history.
Labels: Business Credit Card, credit cards, credit default swaps, the great depression
Credit Card / Financial news blog post by Todd Holliday at 4:09 PM 