Credit card default rates still rising to record levels

Last year in April, I wrote an article poking fun at the irony of Berkshire Hathaway, Warren Buffet’s company, losing its high credit rating. (“Warren Buffet’s credit rating reduced”). Fast forward almost one year from that date, and here I am, writing about the real possibility that the United States of America, the country whose government-issued securities are as good as cold cash, is facing the same situation.

In today’s The New York Times, Moody’s Investors Service, a popular credit rating agency, delivered the bad news. Ironically, Moody’s is one of the widely used credit agencies still under fire for erroneously rating many of those toxic assets that wreaked so much havoc on global economies.

Why is the country’s rating in jeopardy? This looming demotion is no different than a credit downgrade for a consumer whose debt-to-income ratio has gone through the roof. (Of course if he still has a roof). According to The New York Times, the soaring amount of U.S. debt is staggering:

“The administration of President Barack Obama estimates that the U.S. deficit will rise to 10.6 percent of gross domestic product in the current fiscal year, the highest since 1946, and federal debt will reach 64 percent of G.D.P. Government expenditures are expected to rise to a postwar high of 25.4 percent of G.D.P.”

However, there is hope. Mr. Cailleteau, managing director of sovereign risk at Moody’s, says:

“For now, the U.S. debt remains affordable, Moody’s said, as the ratio of interest payments to revenue fell to 8.7 percent in the current year, after peaking at 10 percent two years ago. If that trend were to reverse, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”

If the credit rating of the U.S. were downgraded, the country’s default risk would increase. In other words, that would mean higher interest rates that the government would have to pay to borrow. Who would be paying for that increased risk, at least in part? You and I.

In short, the downgrade is highly unlikely. Just because we are “substantially closer” does not mean we are close. But, it is always nice to know that consumers are not the only ones suffering with credit problems. That feeling of empathy would be short-lived, I suppose, because we as tax payers would get the short end of the stick.

Last year in April, I wrote an article poking fun at the irony of Berkshire Hathaway, Warren Buffet’s company, losing its high credit rating. (“Warren Buffet’s credit rating reduced”). Fast forward almost one year from that date, and here I am, writing about the real possibility that the United States of America, the country whose government-issued securities are as good as cold cash, is facing the same situation.

In today’s The New York Times, Moody’s Investors Service, a popular credit rating agency, delivered the bad news. Ironically, Moody’s is one of the widely used credit agencies still under fire for erroneously rating many of those toxic assets that wreaked so much havoc on global economies.

Why is the country’s rating in jeopardy? This looming demotion is no different than a credit downgrade for a consumer whose debt-to-income ratio has gone through the roof. (Of course if he still has a roof). According to The New York Times, the soaring amount of U.S. debt is staggering:

“The administration of President Barack Obama estimates that the U.S. deficit will rise to 10.6 percent of gross domestic product in the current fiscal year, the highest since 1946, and federal debt will reach 64 percent of G.D.P. Government expenditures are expected to rise to a postwar high of 25.4 percent of G.D.P.”

However, there is hope. Mr. Cailleteau, managing director of sovereign risk at Moody’s, says:

“For now, the U.S. debt remains affordable, Moody’s said, as the ratio of interest payments to revenue fell to 8.7 percent in the current year, after peaking at 10 percent two years ago. If that trend were to reverse, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”

If the credit rating of the U.S. were downgraded, the country’s default risk would increase. In other words, that would mean higher interest rates that the government would have to pay to borrow. Who would be paying for that increased risk, at least in part? You and I.

In short, the downgrade is highly unlikely. Just because we are “substantially closer” does not mean we are close. But, it is always nice to know that consumers are not the only ones suffering with credit problems. That feeling of empathy would be short-lived, I suppose, because we as tax payers would get the short end of the stick.

Today, the Federal Reserve proposed a rule amending Regulation Z (Truth in Lending) to protect credit card users from unreasonable late payment and other penalty fees, as well as requiring credit card issuers to reconsider increases in interest rates. This rule will go into effect on August 22, 2010.

“This proposal addresses two key costs of using a credit card–fees and interest rates,” said Federal Reserve Governor Elizabeth A. Duke. “The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year.”

The proposed rule would:

* Ban inactivity fees. Some issuers have recently instituted an inactivity fee if there are no transactions on your credit card for a certain period of time.

* Force issuers to evaluate rate increases. At least every six months, credit card issuers must reevaluate annual percentage rates increased on or after January 1, 2009. and, if appropriate based on their review, reduce the annual percentage rate applicable to the account. This includes changes in the consumer’s creditworthiness, and to increases in the rate due to changes in market conditions or the issuer’s cost of funds. However, the statute also expressly provides that no specific amount of reduction in the rate is required.

* Stop credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer’s violation of the account terms. Card issuers would no longer be able to charge a $39 late fee for a $20 minimum payment. The fee could not exceed $20.

* Require credit card issuers to provide reasons for increases in rates.

* Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of account terms.

Continue reading “Significant credit card changes proposed by the Federal Reserve” »

Posted by Kevin D. Johnson at 12:00 PM in Current Affairs, F

As more Americans suffer job losses and the inability to meet financial obligations, states are considering legislation that will prohibit employers from using credit checks to deny employment. According to a recent report by the Associated Press, proponents of the idea argue that current restrictions make it increasingly difficult for qualified people to secure work. This year, 16 states from South Carolina to Oregon, have drafted legislation.

I support the move by many states to prohibit credit checks, especially during these difficult economic times. With unemployment rates at record highs, the job market should be fair for everyone who is qualified to perform a job. And, it is no secret: Honest Americans find themselves in financial hardship not because of their own doing in many cases, but in part because of the credit card industry, which by lowering credit limits, has damaged millions of credit reports. Denying people jobs because of poor credit is tantamount to kicking them while they are down.

Finally, the epidemic of bad credit is growing everyday as people make hard choices: Do I pay my credit card bills or feed my family? Do I restructure my mortgage and risk being denied the very job I need? While the idea of what responsible means today has been redefined, the FICO score and credit rating standards have not. (Read Fair Isaac Corporation (FICO) increasingly irrelevant.) Legislation to prohibit credit checks for employment is not only the right thing to do, but also a necessary action to curb soaring unemployment.

What related stories do you have? Have you been denied a job after a credit check?

Continue reading “Banning credit checks on job applicants the right thing to do” »

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