When Dominos Fall and Snakes are Charmed

Dominos have a way of mesmerizing us, don’t they? The whole point of dominos is to watch how one seemingly insignificant piece of plastic can impact literally thousands of others, simply by falling over.

For banks, the first domino to fall was their mortgage portfolios. Now all eyes are turning to credit cards.

Historically, credit card default rates have followed unemployment rates nearly step-for-step. At the end of the fourth quarter of 2008, credit card defaults were at 7.73% on nearly $1 trillion of outstanding credit.

In an effort to cut (their losses) and run, the credit card issuers have been offering some of their customers some unprecedented incentives for – of all things – discontinuing their business. Left and right customers are receiving settlement offers for anywhere from 25% to 60% of outstanding balances. The rationale is that banks will take 25% of what they let you borrow in order to avoiding getting 0% of what they let you borrow.

Unfortunately, not all customers are faring as well. For those who don’t pose a serious default risk, the credit card issuers are looking to make up their lost ground…by raising interest rates and slashing credit limits. In mailboxes all across the country, loyal credit card holders are being notified that interest rates are going from 4% to 24%. For others, they’ll find their credit card limit has been reduced. In one instance, a customer with a credit card balance of $2,345 found that her credit limit was reduced from $5,000 to $2,350 – just enough for one last hamburger.

With their portfolios on very shaky ground, these credit card issuers are recoiling and finding themselves charmed. The same folks, who’ve been shown to purposely delay applying payments to generate a late fee, reduce limits to increase overlimit fee activity, raise interest rates when they find it convenient, and mail applications for their products to three-year olds and dogs have been charmed.

As consumers, we have to ask ourselves: are these the kind of people I want to do business with? And if so: how long can I play with snakes before I am bitten?