Banks Afraid Of Credit Card Debt Going Bad?

Banks and other credit card issuers are afraid to issue any bad debt credit card.  This apprehension is due in part to the massive amounts of bailout dollars that many of these institutions received to stay afloat in 2008 and 2009.  Many of the problems created to the financial and banking system by the banks were created by a lax approach to lending and loosening underwriting standards that did not properly assess and price risk.

Concern for Credit Card Debt

With the large sub-prime or low rated loan debt that many banks carry on their financial statements, credit card debt going bad is an additional concern for many banks.  As the rate of consumer debt increases and the economy stagnates in terms of GDP growth, job creation and other factors, the first area of increased pressure placed on banks and credit card issuers is the amount of revolving debt that consumers take on to make ends meet.  If the average consumer has more than 10 to 20 thousand dollars in debt, the opportunity for default increases and creates a perilous situation for a bank.

Slow Pace of Credit Card Issuance

One side effect of this is that banks have slowed the pace of new credit cards issued and placed restrictions on current card holders.  This has included raising interest rates and lowering credit card limits.  This practice has been addressed through the passage of the Credit Card Accountability Responsibility and Disclosure Act of 2009 or Credit CARD Act.  Banks will no longer be allowed to make arbitrary changes to credit of a current holder without providing a minimum 45-day prior disclosure.

Improvements in the Economy

As the economy improves and personal wealth and disposable incomes rise, banks make be less fearful of credit card debt going bad and increase their activities in issuing new cards or increasing spending limits.  This type of concern comes in cycles and passes as it has in the past.  The positive outcome of this fear is that is has allowed some banks to review their practices and make changes necessary to avoid a future financial calamity.

Consumers with Good Credit

Consumers should be mindful that with good credit and an established relationship with a bank, the acquisition of new credit or an expansion of the terms of an existing card is not impossible to accomplish.  There are banks whose lending and card issuance practices have not been changed by any prevailing financial conditions given their conservative nature.  This means that opportunities still exist for many cardholders and should be sought after when deemed advantageous to the individual and their situation.