New Rule Makes Now The Time To Settle Old Credit Card Debt Banks
Banks that issue credit cards are watching their default rates go through the roof and that’s really bad news considering a proposed change in the Financial Accounting Standard. The new rule could force the banks to increase their cash reserves to cover bad loans leaving less money available for loans to small business and consumers.
What does this mean to the average consumer?
First of all, if you are behind on your credit card payments and you can’t see a way to catch up, now is an excellent time to call your card company and negotiate a cash settlement. It’s probably a good idea to use a non-profit credit counseling service to assist you in coming up with a proposal that is reasonable and a plan for how to pay it.
Why are the banks eager to close out bad credit card accounts? It has been the practice of most banks to bundle credit card loans and sell them as investment deals. These deals are considered “off the books” and as such do not have to be shown on the bank’s balance sheet. In other words they have no impact on the bank’s earnings even if the loans go bad. The new accounting rule will change that and eliminate “off the books” deals.
Banks are regulated and are required to keep a certain percentage of outstanding loans as a cash reserve for defaults. If the loans are “off the books” they are not included in the balance sheet and therefore the bank does not have to keep a reserve on them.
The accounting change will require that off the books loans be placed on the balance sheet and be subject to the requirements of any other loan. What this means is banks will need to greatly increase their cash reserves. To give an idea of how big an impact this will have; American Express says it will have to add $28 billion to its loan balance, Discover $20 billion and Citigroup, a bailout recipient, has to add $98 billion.
That huge influx of new loan liability will require that billions of dollars will have to be set aside as reserves. The fact that at least 10% of those loans are bad has motivated the banks to clean them up as fast as they can. If they can get $600 on a $1000 balance, that means they have just saved on the amount of reserve required for a $1000 loan. Banks are so motivated to reduce the number of delinquent debt that they are actually calling consumers themselves, not using collection agencies, and offering settlements.
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.
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