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Are Credit Cards the Next To Fall After the Mortgage Subprime Crisis?

By Erik Folgate

I read an article on Yahoo Finance today about the possibility of credit cards becoming the next debt product to crumble at the feet of large, private banking institutions.

An excerpt from the article:

The doomsday scenario would play out something like this: Just like CDOs and other asset-backed securities, credit card debt is sliced, diced, and sold off again as packages of securities. Rising delinquencies would hurt not only the banks involved but the securities backed by the credit card receivables. Those securities would decline in value as consumers defaulted, leading to bank losses as well as portfolio losses in the hedge funds, institutions, and pensions that own the securities. If the damage is widespread enough, it could wreak havoc on the economy as much as the subprime crisis has done.

I’ll tell you why financial analysts think this is the next scenario to play out. If so many people are already struggling to pay their mortgage payment, why in the heck are they going to pay their credit card payments? If you are faced with the choice of paying your unsecured debt versus your secured debt that puts a roof over your head, you pay the mortgage first! I’m not saying that it’s right to be delinquent on a credit card. In fact, it’s morally wrong to default on any loan without a good reason. But, when you don’t have the money, that’s a pretty good reason.

Americans are $915 billion dollars in debt with credit cards. I know there are people out there that pay off their balance every month and they rack up a free airline flight or $5 cash back on their shiny, platinum-delta-rewards credit card. But, we need to face reality. There are millions of Americans addicted to spending, and credit cards are their cocaine. The drug dealers are the banks. My position on this issue is the same as that of the immoral subprime lending practices.

It’s a two-way street. We must be more responsible consumers when it comes to using credit cards. The best way to be responsible with them is to just not use them at all if you’ve had a problem with them in the past. It’s no different than a recovering alcoholic saying, “I’ll just have one glass of beer”. Also, banks must start being more responsible with who they issue credit cards to. Even the sleaziest mortgage lenders out there had to follow some rules when it came to getting someone to qualify for a mortgage. But, my dog could get a credit card if she wanted to. She probably would if she knew all of the food she could buy with it!

The final words in this article are the most chilling when thinking about what America will resort to if something isn’t done about the credit card problem:

It’s a sign of the times that, according to one survey last month, 6% of British homeowners have been using their credit cards to pay their mortgages. That’s suicidal, of course, given that credit card interest rates are more than double even the heftiest mortgage. Keep your fingers crossed that it’s not a trend that crosses the Atlantic.

Do you want to be debt-free and start accumulating a bunch of money? Cut up your credit cards today. It’s going to take you about $5,000 worth of spending just to get a free gift card to Outback or an airline ticket to Atlanta. It’s not worth it, people.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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Comments

  • http://www.palonek.ca Edward Palonek

    I agree, this is a serious issue, most people carry a credit card balance, with the high interest rate they have a real tight margin between living costs and mortgage. So each month less and less balance is paid off, thus making the credit cards the next bust.

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