Behind On Your Credit Card-Now's The Time To Settle For Less Than You Owe
Defaults on credit card debt continues to soar and it is about to get worse for the banks issuing the cards. A proposed change in a Federal Accounting Standard could jack up the default rate by a third requiring banks to increase their reserves which in turn would decrease the capital available to lend.
So what does that mean for 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.
It is a common practice of banks to bundle credit card loans into an investment vehicle and then sell them on the market. When they do this, they don't have to show those loans on their balance sheet as they are "off the books" deals. The change in the accounting standard will stop this practice and those loans will have to be shown on the bank's books.
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 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.
Billions of dollars will be needed to cover the cash reserve requirement once those new loans are added to the books. Banks know that at least 10% of the loans are bad and the potential for that to go up is very real. The more defaults, the more the reserve needs to be replenished. As a result, banks are motivated to accept settlements for less than the amount owed. In fact some banks are making the first contact with card holders who are behind offering discounted deals.
If a consumer is already behind on their credit card bill their credit score is already trashed. There really is no downside to negotiating a discounted settlement providing you have the cash to do it. Credit counseling organizations can provide ideas on how best to handle the deal. This could be a time where the consumer can eliminate some serious debt.
So what does that mean for 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.
It is a common practice of banks to bundle credit card loans into an investment vehicle and then sell them on the market. When they do this, they don't have to show those loans on their balance sheet as they are "off the books" deals. The change in the accounting standard will stop this practice and those loans will have to be shown on the bank's books.
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 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.
Billions of dollars will be needed to cover the cash reserve requirement once those new loans are added to the books. Banks know that at least 10% of the loans are bad and the potential for that to go up is very real. The more defaults, the more the reserve needs to be replenished. As a result, banks are motivated to accept settlements for less than the amount owed. In fact some banks are making the first contact with card holders who are behind offering discounted deals.
If a consumer is already behind on their credit card bill their credit score is already trashed. There really is no downside to negotiating a discounted settlement providing you have the cash to do it. Credit counseling organizations can provide ideas on how best to handle the deal. This could be a time where the consumer can eliminate some serious debt.
About the Author:
Chris A Smith follows 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 check out the video Don't Buy Stuff You Cannot Afford
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