New Rule Makes Now The Time To Settle Old Credit Card Debt Banks
12:11 AM
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.
So how does this impact 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.
Because of a change in the FAS, banks will be required to bring "off the book loans" and put them "on the books". It has been a common practice for banks to bundle credit card loans into an investment vehicle and sell them to the market. These loans, because they are investment vehicles, did not have to be shown on the bank's balance sheet.
Banks that are FDIC insured are all regulated. Part of that regulation requires that banks keep a cash reserve equal to a percentage of all loans lent as a reserve against bad debt. Off the books loans were not included on the balance sheet so the banks did not have to have a reserve set aside for 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.
So how does this impact 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.
Because of a change in the FAS, banks will be required to bring "off the book loans" and put them "on the books". It has been a common practice for banks to bundle credit card loans into an investment vehicle and sell them to the market. These loans, because they are investment vehicles, did not have to be shown on the bank's balance sheet.
Banks that are FDIC insured are all regulated. Part of that regulation requires that banks keep a cash reserve equal to a percentage of all loans lent as a reserve against bad debt. Off the books loans were not included on the balance sheet so the banks did not have to have a reserve set aside for 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.
About the Author:
Chris A Smith follows the personal finance and credit business and has authored informative and useful articles on alternative loans, bankruptcy, credit repair, credit law and much more. Be sure to chek out the video Don't Buy Stuff You Cannot Afford
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