Who Could Have Predicted (Credit Card Edition)
Unintended consequences of ther Bankruptcy Bill of 2005:
The credit scores of millions more Americans are sinking to new lows.
Figures provided by FICO Inc. show that 25.5 percent of consumers — nearly 43.4 million people — now have a credit score of 599 or below, marking them as poor risks for lenders. It’s unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.
Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.
“I don’t get paid for loan applications, I get paid for closings,” said Ritch Workman, a Melbourne, Fla., mortgage broker. “I have plenty of business, but I’m struggling to stay open.”
So let’s review. In 2005, Congress reformed the bankruptcy laws, making it much more difficult for people to obtain bankruptcy protection from credit card debt. Individual bankruptcies from credit cards are nowhere near the dollar amount of say, corporate bankruptcies, but that wasn’t really taken into consideration. At the time I predicted no good would come of this, and I was right: first, Washington Mutual and Wachovia admitted that their obsession with credit card debt destroyed their mortgage divisions, because the debt people hold on credit cards pales in comparison to the debt on mortgages, which, for the first time ever, people were walking away from. OOOPS.
I’ve further predicted (i don’t know where it is in the blog, but it’s somewhere) that eventually the credit card and credit reporting companies are going to have to refigure what “good credit” looks like, especially during this period of extending unemployment for a growing percentage of the country. back to the original article:
More are likely to join their ranks. It can take several months before payment missteps actually drive down a credit score. The Labor Department says about 26 million people are out of work or underemployed, and millions more face foreclosure, which alone can chop 150 points off an individual’s score. Once the damage is done, it could be years before this group can restore their scores, even if they had strong credit histories in the past.
I never use my credit card if I can help it, and in fact used almost all of my tax refund to pay off my cards (and in doing so did not stimulate the economy one iota). Right now 25% of Americans have shitty credit. Soon that will be 30%, then 40%, and (as Susie Madrak points out) soon 50%. The percentage of creditworthy borrowers is shrinking every day as our economy continues to contract (it ain’t a recovery with no jobs). Eventually, that pool will be so small that it’s going to hit the profit margin as people decide they’re not going to use credit anymore.
Toldya so.
July 12th, 2010 at 1:20 pm
Don’t worry about the banks- they weren’t going to increase lending to businesses or individuals anyway.
It’s not just that the potential borrowers are too risky- the banks are changing roles right now.
In order for a bank to be considered solvent, an auditor has to certify that their loan portfolio (assets held by the bank) are performing adequately.
Mortgages (both commercial and residential), consumer debt and business loans aren’t as risk free as they used to be. The bank can demand higher interest rates to offset the risk. But debtors aren’t buying.
So the banks are looking for low risk debt. Safest bet right now are US Treasurys. 10 year T-bills are earning around 3%.
The Federal Reserve will loan those same banks money at .25%. A banker can borrow everything they can from the Fed, buy Treasuries and even post some of them as collateral. Everybody’s happy, right? The banks get free money (the 2.75% spread), we no longer need the Chinese or Japanese to buy our debt and the auditors can claim that the banks are chock full of safe investments.