mortagesandforeclosures

by Chris A Smith

Credit card default rates are at 10% the highest ever. Banks who issue credit cards may have to greatly increase the amount of cash reserves to cover these debts thanks to a proposed accounting standard change. More money for reserves means less money for lending.

What does this mean to the average consumer?

Consumers who are behind on the bill from their credit card should seriously consider contacting the bank and negotiating a discounted settlement. Using a credit counseling service is a good idea so the offer is reasonable and there is a plan in place to pay the settlement. Savings of thirty to forty percent or more are possible.

Why are the banks eager to close out bad credit card accounts? It has been the practice of most banks to bundle credit card loans and sell them as investment deals. These deals are considered "off the books" and as such do not have to be shown on the bank's balance sheet. In other words they have no impact on the bank's earnings even if the loans go bad. The new accounting rule will change that and eliminate "off the books" deals.

Bank regulations require that a cash reserve be kept to cover bad debt on loans. However, since the off the books investment packages are not included on the bank's balance sheet, there is no requirement to keep a cash reserve for them.

The accounting change will require that off the books loans be placed on the balance sheet and be subject to the requirements of any other loan. What this means is banks will need to greatly increase their cash reserves. To give an idea of how big an impact this will have; American Express says it will have to add $28 billion to its loan balance, Discover $20 billion and Citigroup, a bailout recipient, has to add $98 billion.

That huge influx of new loan liability will require that billions of dollars will have to be set aside as reserves. The fact that at least 10% of those loans are bad has motivated the banks to clean them up as fast as they can. If they can get $600 on a $1000 balance, that means they have just saved on the amount of reserve required for a $1000 loan. Banks are so motivated to reduce the number of delinquent debt that they are actually calling consumers themselves, not using collection agencies, and offering settlements.

There really is no downside for the consumer. By being late on the payments, the consumer's credit rating is already damaged. If the cash can be put together the consumer can get a significant discount on their debt. However, the time to act is now. Late fees and a default interest rate of 30% are still being applied so why wait.

About the Author:

Chris A Smith writes the personal finance and credit industry and has authored informative and useful articles on debit cards, bankruptcy, credit rebuilding, credit law and much more. Be sure to chek out the video Don't Buy Stuff You Cannot Afford

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