Credit Card Bubble

Many cardholders live in an ever-growing credit card bubble with multiple credit cards and high levels of credit card debt. Learn what can happen and how to be prepared if your credit card bubble bursts.

Eliminate Your Credit Card Debt Before the Bubble Bursts

Since the early 1990s, the credit card industry has been actively encouraging consumers to increase their credit card debt. New cards with exciting new features, ever rising credit limits, zero percent and short-term APRs as well as enticing balance transfer offers have caught the attention of consumers.

Many cardholders have ended up with a wallet full of credit cards, each with a balance. More than 70% of cardholders maintain a balance on their credit cards resulting in monthly finance charges. Of those cardholders with a balance, one in six is paying only the minimum balance owed each month.

Many cardholders have no idea how much they owe in total credit card debt, nor do they know how many years it will take to pay off their debt if they only continue to make minimum monthly payments. This easy use of credit, and the growing number of cardholders unable to pay their credit card obligations, is frequently called the Credit Card Bubble.

As the housing and financial markets began to tighten in 2007, many credit card issuers started to slowly make some changes in their credit card programs in order to increase their profits. The first changes included:

• A reduction in the number of preapproved credit card offers mailed to prospective cardholders
• A slow down on the number of promotional offers extended to current cardholders
• An increase in the minimum credit score required to apply for a new credit card
• A tightening of the rules to penalize those who were late making their payments, sometimes raising the APR to a default interest rate which could be as high as 30 percent
• Changes in the features of the cards, such as fewer rebates offered

More and more cardholders started to feel the pinch of higher credit card bills, higher interest rates and less credit available.

Starting in 2008 Congress started to work on new legislation to protect the credit cardholder. Initially the legislation centered on consumer education – ensuring that the cardholder understood what they were agreeing to when they applied for a credit card. The goal of the legislation was to change practices of the credit card industry which had seemed unfair to credit card consumers. This legislation was often informally called the Cardholder's Bill of Rights.

In December 2008 the first set of new credit card laws were passed giving card issuers until 2010 to provide more notice of rate increases, eliminate excessive fees and provide cardholders with information about their account that was easier to understand.

Additional credit card legislaton was passed in May 2009 which provided even more requirements for the card issuers to implement by 2010 including the elimination of unfair rate increases, unnecessary fees, more fairness in the way payments are applied to the balance owed and more warning of a forthcoming change in the APR or other terms.

The new credit card laws were designed to change many of the policies and procedures of credit card issuers. Credit card issuers will continue to look for ways to increase their profitability to offset procedures which they had to curtail as of 2010. These new laws, combined with a growing number of cardholders who are defaulting on their credit card payments, are causing a potential for a major profit loss by card issuers. To combat this potential loss, card issuers have made, and will continue to make, changes which will affect the individual cardholders including:

• Increase in minimum monthly payments – Minimum payments at some card issuers have increased by 100 percent or more. For example, if a minimum payment was previously 2 percent of the balance, it could see increases to as much as five percent or more. A cardholder with a $3,000 balance could see their minimum payment increase from $60 to $150 if their required minimum monthly payment increases from 2 percent to 5 percent.
• Reduction in credit lines – Credit card issuers are significantly reducing the amount of credit available to a cardholder unless the cardholder has an excellent credit history.
• Reduction in your FICO score – Thirty percent of a FICO score is based on your utilization of outstanding credit that is available to you. If your credit card issuers significantly reduce your credit lines, this will mean that you are now using a larger percentage of your available credit, which is a negative factor when evaluating your FICO score.

You can minimize the impact of changes by credit issuers if you concentrate on managing your credit and building your FICO score. Here are a few tips:

• Pay off debt – Concentrate on actions to pay off your existing credit card debt.
• Avoid making late payments - Consider setting up an automatic bill payment plan for your credit card from your checking account.
• Use credit wisely – Pay cash or use a debit card or prepaid credit card for purchases. Carry only one or two low rate credit cards for emergencies. Put your other credit cards away in a safe place.
• Read credit card offers carefully – Look for the ending dates of promotional APR offers. Learn what the rate will become at the end of the promotional period.
• Understand the terms and conditions – Know when your bill is due. Be aware of what the rate will become if you miss a payment and how long that higher rate may be in effect. Check out the fees charged for a balance transfer or the use of a convenience check.

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