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I thought that there was recent legislation passed that forbid banks for jacking up rates as they had been doing from late 2008 into the first half of 2009. All of my credit cards have seen increases into the 25% range AND, at the same time, they have slashed my credit limit down to just above the debt level.

I used to have a 740 FICO score with debt ratios of 25% (debt to credit level). Since the rates have been jacked up and the credit levels dropped to just above each card's respective amount of debt owed - it LOOKS LIKE I have gone on a spending spree. I have not, however. My FICO score is now 530, my credit rating destroyed by this artificial "maxing out" of my credit that these banks have done.

I have never missed one payment (yet) and I can not afford to pay off my balances (in full) at this time. I must make minimum payments, even though the rates have nearly tripled those minimum payments now. As a small business, with this recession, I cant even get a banker to speak to me about the situation - let alone get a loan to help me continue working so that I can earn the money to pay these cards off. I do not own a home, I have no major assets to back a loan - even if the banks would offer such an instrument.

Why are banks putting people deeper into debt like this? Are they wanting to bankrupt even more people - via these artificial means? I cant stress enough that I have not increased spending. If anything, my spending came to a halt in late 2008. Food, gas, insurance - thats about it. I have no employees - I am a sole proprietor.

I thought they (banks) received bailout monies to assist them in easing the frozen lending? Lending seems to have frozen over 5 times since Henry Paulson first warned us all about this problem. I also thought the stimulus bill was supposed to assist banks and people. Then I thought I remember hearing, back in Spring 2009, that some legislation was to have prevented banks from raising interest rates and slashing credit limits. Nothing seems to be working.

Can anyone explain this credit disaster that is slowly unfolding?

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Because people are going deeper into debt and filing for bankruptcy more often, there is more risk on behalf of the credit company. Therefore, they limit their risk by lower limits and increasing interest.

For every person that goes bankrupt, there might be 10 that pay that new higher interest rate, thereby netting a profit even though they lost out completely on the one customer.

The recent legislation limited how and under what circumstance rate are adjusted and raised, but not forbidden.

As for the fact that these banks took tax money under the idea (we all thought) I see two points of view.

  1. We never should have had the credit we did, so they are correcting and you (like me and millions of others) are suffering for their prior mistakes. It is an honest attempt to correct the system for long term stability even if we suffer in the short term.

  2. We gave them tax money, they need to not screw us over. In response to the still frozen credit markets I would suggest penalty taxes to companies that do not lend. Penalties to companies that do not modify mortgages. The second you take government money is the last second a you are entitled to a profit of anything. Furthermore, we the people bought you and we the people get to decide your salary.

The bottom line is there is truth in both statements. Things are totally screwed up right now because we ALL made mistakes in the past trying to get a bigger profit or own a bigger house. There are those among us who didn't make a mistake, and those among us who made nothing but mistakes. As a society, we have to pay the piper either way.

The best thing you can do now is pay down your debts, live simply and spend your money wisely.

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Of course your situation is very hurtful at a personal level, and I sympathize. I just don't get your point about being driven further into debt? It would seem that with a lower credit score you are prevented from taking on more debt. That can absolutely be hurtful especially to someone who runs a business that relies on short term credit.

As for why they do this, they do it to reduce their risk - they don't want to lend more money, they are afraid that you will lose your job and default. Of course it is not as personal as I am writing it, not for you (they don't target you personally - they target your credit profile) and not for them (it is a matter of how the market views the debt and how much they can trade on such debt, not what they want to do personally).

As for the TARP bailouts not releasing enough credit - this is reality. Goverment always thinks it can influence the situation more than it actually can. In order to unfreeze credit there needs to be a growing economy that makes the risk look acceptable. No amount of Goverment nudging will really change that more than marginally.

By the way, legislation like this (forcing credit card companies to not raise their rates) can lead to credit restrictions. By artifically forcing the rates down the risk has to be ballanced somewhere - so it will be ballanced by lowering credit lines or by other means. Like any price control, if you restrict the price, it causes shortages. Intrest rates are the price of credit.

  • Thanks! To answer your question "I just don't get your point about being driven further into debt?" I mean that in an artificial way. To the credit reporting agencies, it SEEMS as if I've taken on more debt. What used to be a $10K credit line and $1,800 balance (18% debt load), was slashed to $2,000 credit line. Next month, that same $1,800 balance yields a 90% debt load. The change happens in <30 days to the credit agency. Multiply this by 6 cards and the FICO score plummets. Prior to this I was a responsible card holder, not wracking up debt. I am still not, but on paper it looks like I am – Taptronic Dec 7 '09 at 13:43
  • Don't forget each card company stands unto themselves. Even if they all happen to use Visa to process, they are still separate banks with separate bottom lines to protect. It really is a perfect storm we are all in right now. – MrChrister Dec 7 '09 at 17:49

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