New Accounting Rule Good News For People Behind On Credit Cards
Posted by: Guest Author / Category: LoanDefaults 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.
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 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.
There really is no downside for the consumer. By being late on the payments, the consumer’s credit rating is already damaged. If the cash can be put together the consumer can get a significant discount on their debt. However, the time to act is now. Late fees and a default interest rate of 30% are still being applied so why wait.
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.
Tags: bank, Credit Card Debt, debt, default, Loan, Loans, negotiated settlement, settlement