CHESSNOID

I blogged about this awhile back Credit card bailout coming soon and have been getting more hits on this lately as the recession becomes worse.  Consumers are looking for relief in similar fashion to the banks and companies being bailed out by the government with taxpayer money.

Right now credit card delinquencies are skyrocketing and will continue to trend that way for at least the next few quarters before it begins to level off.  According to  Reuters:

Delinquencies on U.S. credit cards rose to record highs in January as the economic recession weakened consumers’ finances, Fitch Ratings said on Wednesday.

Payments at least 60 days late measured by a Fitch index rose 0.47 percentage point to 3.75 percent last month, after accelerating in the fourth quarter, Fitch said in a statement. The previous record was 3.73 percent in February 1997.

“U.S. consumers continue to struggle in the face of mounting pressures on multiple fronts, from employment to housing to net worth,” Michael Dean, a managing director at Fitch, said in the statement.

Concerns that the U.S. recession will deepen as foreclosures rise and businesses lay off thousands have sparked a flurry of unconventional moves to spur growth, including credit-easing measures that have already doubled the size of the Federal Reserve balance sheet to more than $2 trillion.

A Fed program to lend up to $200 billion to holders of ABS backed by new or recently issued consumer loans is expected by analysts to boost availability of loans for autos, education and credit card balances.

But rising delinquencies and charge-offs by credit card companies will hurt performance of asset-backed securities (ABS) supported by credit card receivables, Fitch said. But downgrades are seen limited in the near-term, it added.

Total charge-offs on prime, general purpose credit cards from the December collection period rose 0.66 percentage point to 7.5 percent, up 40 percent from a year earlier and the highest since bankruptcy reforms caused a spike in 2005, according to another Fitch index.

Fitch estimates charge-offs will near 9 percent by the second half of this year.

What this will translate into the future will be more losses to credit card companies that will force the government to step in like they have for mortgage and auto companies.  Personally, I am against all these bailouts with tax money.

The credit card bailout would only help those who are seriously behind and not just 1 or 2 months.  It will be similar to people  who are on the verge of losing their homes.  The credit card companies will “bail  out” consumers by offering principal reductions of 20 – 40% and lowering interest rates to 0%  only if they are delinquent and on the verge of being charged off or written off.  They are not being nice, but tricky.  The credit card company will try to recover the principal reduction by being paid out by the government with tax  money.  That would reduce their losses and pass the bill to taxpayers.

This would follow the same pattern for the previous bailouts.  Every big company that wants to stay in business via government bailout will have their lobbyists make sure the politicians in their pocket follow through with making sure they are in the bailout packages.  The biggest beneficiary is the credit card company not the consumer.

What happens to consumers who are current and have paid on time.  Nothing.  They will be punished and will continue to pay the current rates  on their full balance and will not benefit from the same tax money they paid to bailout the credit card company and their delinquent customers.  Definitely a moral hazard that puts everyone in jeopardy which makes credit scores and credit reports worthless.  If you want principal reductions and 0% interest rates, then you must become delinquent on your obligation to qualify for the better terms.

On a side note, if you are in financial dire straits, then I would follow this financial adviser’s response.  LA Times:

Let 401(k) be if bankruptcy looms

Dear Liz: I am wondering about withdrawing my 401(k) early to pay off debt. My husband is the primary breadwinner of our household and has just been laid off.

At the beginning of 2008 we had over $25,000 in debt, which we reduced to $19,000 over the last year. I fear that without his income we will be facing bankruptcy. We have considered refinancing our home, but our second mortgage has a prepayment penalty until September.

I realize that cashing out my retirement is possibly the worst option, but I am running out of ideas. If you have any advice I would appreciate it.

Answer: In most cases, you’ll want to conserve cash after a layoff. That means paying just the minimums on your debts while you look for ways to cut expenses and find cash (by selling stuff or taking part-time jobs, for example). Once you’ve got your expenses comfortably below your income you can begin to repay your debts out of that income.

Withdrawing money prematurely from a 401(k) is usually a bad idea, but that’s especially true if bankruptcy is a possibility, since retirement accounts are off-limits to creditors. In other words, you’d be taking money that would otherwise be protected and using it to pay debts that could be erased in a bankruptcy filing.

You would also be incurring unnecessary taxes and penalties that can eat up 25% to 50% of your withdrawal, and you’d lose all the future tax-deferred returns that money could have earned.