Credit Cards Next to Face Downturn

There are rumors that the Fed will lower the prime rate again on Wednesday. The cut in September of 50 basis points was the first reduction in 4 years. The big players perceive a second rate cut as a panacea that will cure the ills of the crackdown on credit.

The biggest impact will be on the inter-bank rate. Banks will be able to borrow from each other at a lower rate. So far the rate decrease has minimal effect at the consumer level. The banks are making more on the yield spread and in fees, but rate reductions have not been passed on to the consumers. It does not matter how much the prime rate is lowered. If the rates do not trickle down to the borrower, it won’t make any difference.

Tighter lending standards are making it more difficult for lower level borrowers to borrow. They are finding it harder to refinance out of high rate mortgages or to restructure debt and effectively lower payments. I have to ask, “What is the point?” I get offers to refinance or consolidate at higher rates than currently held. If the debts can not be repaid, then the lender will be left holding the bag.

A few months ago, polls had some interesting information regarding credit card debt. It seemed that more people were willing to default on a house payment than their credit card. I feel that will soon be changing. WaMu is starting to take a hit due to increased delinquencies in their credit cards. They had a record year for new card applications. People are currently unable to refinance their house to pay credit card debt and are applying for new credit cards. Introductory rates on new credit cards and balance transfer options from pre-existing accounts will not solve their problems. Most studies indicate that even after a consolidation or balance transfer, the average consumer charges the old accounts back up to their earlier balance.

In the U.K. home prices saw their peak and fall 18 months ahead of the U.S. Apparently the next tier of the house of cards in dubious debt is beginning to make its decline. HSBC banking giant sold two credit card divisions, Beneficial and Marbles, to SAV. HSBC acquired Marbles as part of its purchase of US lender Household International in 2003. Marbles stopped taking new customers in April. Is HSBC divesting themselves of subprime credit cards to SAV Credit Ltd. before the next collapse of dubious lending?