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.
So how does this impact the consumer?
If you are seriously behind on your credit card bill and you see no way to pay it on a timely basis, now is the time to negotiate a discounted cash settlement. You may be able to save thirty to forty percent of what you owe. It's a good idea to use a non-profit credit counseling service to walk you through the process and develop a plan to pay for the settlement.
Because of a change in the FAS, banks will be required to bring "off the book loans" and put them "on the books". It has been a common practice for banks to bundle credit card loans into an investment vehicle and sell them to the market. These loans, because they are investment vehicles, did not have to be shown on the bank's balance sheet.
Banks that are FDIC insured are all regulated. Part of that regulation requires that banks keep a cash reserve equal to a percentage of all loans lent as a reserve against bad debt. Off the books loans were not included on the balance sheet so the banks did not have to have a reserve set aside for them.
The proposed change in the accounting standard will require that all loans, to include off the books loans, be carried on a bank's balance sheet. That means that banks are going to have to set aside additional cash to cover the reserve requirement of the formerly off the books deals. Between AMEX, Citigroup and Discover card, over $146 billion in new loans will be added to bank balance sheets.
Adding those kinds of numbers to their outstanding loans will mean that the cash reserves will have to be increased by billions of dollars. Consequently, banks are open to consumers negotiating a lump sum settlement. If a bank can get $700 on a $1000 balance, that's $700 that they don't have to hold a reserve on and that makes them motivated. Motivated to the point that some banks are actually calling the card holder first and they are calling themselves rather than hiring collection agencies.
Settling for less and cancelling the account really has no downside. A past due account has already damaged the consumer's credit rating and settling isn't going to hurt it anymore than it already is. The challenge is to get the best discount deal possible. Now is the time to do it.
So how does this impact the consumer?
If you are seriously behind on your credit card bill and you see no way to pay it on a timely basis, now is the time to negotiate a discounted cash settlement. You may be able to save thirty to forty percent of what you owe. It's a good idea to use a non-profit credit counseling service to walk you through the process and develop a plan to pay for the settlement.
Because of a change in the FAS, banks will be required to bring "off the book loans" and put them "on the books". It has been a common practice for banks to bundle credit card loans into an investment vehicle and sell them to the market. These loans, because they are investment vehicles, did not have to be shown on the bank's balance sheet.
Banks that are FDIC insured are all regulated. Part of that regulation requires that banks keep a cash reserve equal to a percentage of all loans lent as a reserve against bad debt. Off the books loans were not included on the balance sheet so the banks did not have to have a reserve set aside for them.
The proposed change in the accounting standard will require that all loans, to include off the books loans, be carried on a bank's balance sheet. That means that banks are going to have to set aside additional cash to cover the reserve requirement of the formerly off the books deals. Between AMEX, Citigroup and Discover card, over $146 billion in new loans will be added to bank balance sheets.
Adding those kinds of numbers to their outstanding loans will mean that the cash reserves will have to be increased by billions of dollars. Consequently, banks are open to consumers negotiating a lump sum settlement. If a bank can get $700 on a $1000 balance, that's $700 that they don't have to hold a reserve on and that makes them motivated. Motivated to the point that some banks are actually calling the card holder first and they are calling themselves rather than hiring collection agencies.
Settling for less and cancelling the account really has no downside. A past due account has already damaged the consumer's credit rating and settling isn't going to hurt it anymore than it already is. The challenge is to get the best discount deal possible. Now is the time to do it.
About the Author:
Chris A Smith writes the personal finance and credit industry and has authored informative and useful articles on savings, 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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