Credit Crunch Hits Consumers, Companies
MICHELE NORRIS, host:
Beyond the markets, beyond the mortgage crisis, here's another sign of the strained economy: people are having a harder time paying those credit card bills, delinquencies are creeping upward, and banks are jacking up interest rates, lowering credit limits and introducing new fees.
To find out more about this, we called Robert Manning. He's the director of the Center for Consumer Financial Services at the Rochester Institute of Technology. He's also the author of the book, "Credit Card Nation."
Mr. ROBERT MANNING (Director of the Center for Consumer Financial Services, Rochester Institute of Technology): American consumers are, in many cases, now because they don't have access to credit and the asset value of their homes, the one source of credit that's available to them at higher and higher interest rates is credit cards.
On the other hand, what we're seeing also is that foreign investors that are seeking to purchase credit cards are looking at them more and more in terms of credit card debt portfolios as another form of a subprime loan product, and they're shying away increasingly at a period in time when American banks desperately needed infusion of outside capital.
NORRIS: How are the problems in the credit card sector related to the mortgage mess? And, could we possibly be looking at a rerun of the subprime mortgage meltdown?
Mr. MANNING: Well, what has concerned me over the last six or seven years of people who were qualified for higher lines of credit on their credit cards because they had a house that they owned and the perception was the bank would encourage people to pay off their credit cards or the home equity loan.
With that option over, what we're going to see now is more and more people that are less and less credit-worthy and more and more facing the risk of losing a job during a recession that will have no other recourse - when they hit the maximum on their credit cards - but to seek some form bankruptcy protection. What we've clearly seen is that foreclosure of the home is soon going to follow the default on the credit card. And this is a double whammy that the American banking system is much, much less capable of withstanding today.
NORRIS: What's surprising is banks are raising rates, lowering limits, taking steps to protect themselves from losses. But in some cases, they're raising interest rates on customers who have good credit, people who have no late payments, no blotches on their credit histories, how can they do that?
Mr. MANNING: You know - and that's something that's especially troubling in this period of time, is we have to understand that a major credit card issuer also is assuming huge losses on their subprime and other mortgage and fixed equity investments, that's putting pressure on the credit card divisions to return higher profits.
So as a result, what we're seeing is more and more Americans who've completely played by the rules of the game and paid on time, finding that their interest rate is jumping, 5, 10, 15 percent, and so many of these decisions now are a product of the information economy, because it's a relatively new expense of the poor credit reports, and some credit card companies actually monitor what you purchase on your credit card. If the company doesn't like it and they decided that makes that person more at risk, simply making purchases and paying on time could still trigger an increase in the cost of credit.
NORRIS: So the credit card companies are monitoring purchases. If someone is using their credit card to pay off a mortgage or to buy essentials like bread or milk or something like that, could that be a trigger?
Mr. MANNING: Oh absolutely. There's a lot of concern, for example, of somebody who bought new tires, and they didn't like the fact that they purchased retread tires and that triggered somebody in the risk management office of the credit card company to say, this person was falling into a period of financial distrust, and they re-priced and raised the interest rate on that account holder.
NORRIS: Mr. Manning, if we're looking at rough waters ahead in the credit card sector, what can or should consumers do right now to protect themselves?
Mr. MANNING: Well, that's really, really important that, in fact, consumers monitor their monthly statements and call and complain at any increase in their interest rates, question any fees that have been incurred. And also, it's incredibly important today that people pay their monthly payments earlier than the due date so that they don't fall into a re-pricing scrutiny of the credit card industry, so that they have one late fee that could trigger hundreds of dollars of higher interest rates with their other financial accounts.
NORRIS: Mr. Manning, thanks for talking to us.
Mr. MANNING: Always.
NORRIS: Robert Manning is the author of "Credit Card Nation." He's also the director of the Center for Consumer Financial Services, that's a research center at the Rochester Institute of Technology.