Real story behind credit card limit & declined card stories:THE CARD COMPANIES HAVE NO MONEY TO LEND

[HamdenRice]

There has been a slew of stories in the liberal blogosphere about credit card companies arbitrarily and unilaterally telling card holders that their limits have been lowered, or declining routine purchases on cards, or even canceling cards.

The credit card companies are trying very hard to convince card holders that they did something wrong or that they have new card holder credit rating standards, and so on.

But that's not the real reason. The real reason is as clear as the latest headlines in the business section of any newspaper, and I wish I could shout this over and over again:

THE CREDIT CARD COMPANIES HAVE NO MONEY TO LEND TO CARD HOLDERS.

This is because, as with mortgages, the companies that appear to be lending you money are actually not doing so. They are "originating" and "servicing" the loans that are represented on your credit card bills. But for years, they have been using other people's money, and that source of money dried up back in October.

When you charge something on a credit card, that debt becomes a "credit card receivable." (It's called a receivable in the same sense as the bookkeeping term, "accounts receivable." It's money that is expected to come in shortly.)

These credit card receivables have been packaged into trusts, and trust certificates sold to banks, financial companies, and institutional and foreign investors. They are just like "mortgage backed securities," but they are called "credit card receivable asset backed securities."

The total amount of US "credit card receivables" is around $960 billion although not all of them are securitized. But in a peak year like 2007, the total amount of securitized credit card receivables was around $95 billion per year.

That market froze in October, which means credit card companies have lost the source of the money they were lending to credit card holders. That means investors will not buy credit card receivable backed securities or lend money taking them as collateral. Also, as people lose their jobs and fail to pay their credit card balances, credit card receivable backed securities look even worse to investors that mortgage backed securities. Credit card receivable backed securities have become "toxic assets" just like mortgage backed securities.

Bloomberg reports that Moody's estimates that the total amount of credit card receivable backed securities that will be sold in all of 2009 could be as little as $10 billion.

They have no money to lend you, but they want to make you think that you are unworthy of their money.

The shut down of the credit card receivable market contributes to the vicious downward spiral of the economy because as people can't use their credit cards, they spend less, which means lower demand for products which means more layoffs in the retail sector.

Here is a news story from Bloomberg about it:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aInk6vXOwoB0&refer=home

Bank of America, AmEx May Suffer on Card Defaults

...

The market for bonds backed by credit-card payments, once a major source of funding for lenders including American Express, froze in October after investors demanded wider spreads on new debt. Companies issued $76 billion in securities last year, down from $95 billion in 2007, and may sell as little as $10 billion in debt this year, according to Moody’s.

[marmar]

1. That's what I figured......they couldn't finance a popsicle stand right now.

n/t

[Rockholm]

2. The credit card companies are responsible for the bankruptcy laws.

They pushed the changes in bankruptcy a couple of years ago. Why? Because they were also in the mortgage business (Citi, MBNA, Chase, etc.) They knew that ARM's were going to be resetting and knew damn well what was coming down the pike.

[closeupready]

4. And our own Joe Biden sponsored that abomination.

:mad:

[Rockholm]

5. Regretfully, yes.

The major credit card companies are holed up in downtown Wilmington. Grr.

[aikanae]

10. Credit Card Companies targeted high risk, low income people

After the Bankruptcy Act changed, the credit cards companies intensified marketing towards people who were high risk, low income or had bad credit. The offers were bad; annual fees, high interest, compounding interests such that some cards were almost maxed out be the person had made a single charge. A friend on disability getting $800 / month was targeted with about 3 offers a day for "pre-approved" credit cards.

Totally stupid.

I think the government can do a better job of managing money right now. Nationalize them.

[RaleighNCDUer]

3. they want to make you think that you are unworthy of their money.

when the truth is, they are unworthy of OUR money.

[BanzaiBonnie]

6. Do the health insurance companies have money to pay our doctor bills?

We are getting more and more billings that are showing unpaid and supposedly it's because the insurance company was not given all the info it needed to process the claim.


I'm wondering how solvent they are.

[xchrom]

7. i've had that happen to my family.

it's a real WTF moment.

because except that they make you responsible -- you have nothing to do with it.

[Mojorabbit]

9. Same at my husband's

office. It is taking forever to get paid.

[aikanae]

11. Typical: The longer money stays in their hands, the more they make

Even delaying payment for a day longer results in lots more money for them in interest.

[Catherine Vincent]

8. My mother received one of those letters from Discover Card

They took away her 5K limit. But this weekend, she showed me the letter where they reinstated the 5K limit again.

[this_side_up]

12. Maybe hacking has something to do with their problems?

they don't name the 3rd party vendor. Could it be that ChoicePoint again?
Who has to eat the loss? And the hacking isn't confined to just OTCU
either; have read other sites where people complain they had to get
a new bank debit card.


VISA Debit Card Fraud

There has been a lot of media attention about a VISA debit card compromise that has occurred at a third party and is affecting Oregon Territory Federal Credit Union members as well as cardholders of other financial institutions.

While the majority of our members have not experienced fraud, Oregon Territory is taking this third party compromise seriously and is re-issuing replacement cards for affected members. Oregon Territory is not responsible for the compromise of card information.

Oregon Territory is no longer directing affected members to file a police report. Instead, members who notice fraudulent activity on their account should call Oregon Territory at 503-585-6296 or 800-422-0533. They will be required to complete our Debit Card Transaction Dispute Form.

The occurrence of VISA debit card fraud has increased and unfortunately, financial institutions have no way of preventing criminals from “hacking” into the databases of merchants. Again, Oregon Territory’s database was not compromised. To protect our members, minimize inconvenience and losses, Oregon Territory requires compromised cards to be replaced immediately.

[JerseygirlCT]

13. Ah. That does make sense. Thanks. nt

[Mike 03]

14. This is what I believed too, but I have a question: Why are my Credit Card carriers raising my

limits and encouraging me to spend. One of them even sent me "blank checks".

One of these companies is in dire straits, so far as I know (Citi).

I can't understand it at all.

I'm dying to figure out what is going on.

[glowing]

17. The reality is that these companies are wayyy too big.. One doesn't know their

head from their ass. I had a Chase C.C... I told them I was having problems.. pay the c.c. large amts or pay my mortgage with them.. One results in $7000.00 in interest a year, the other was a total of $5000.00. I asked them if I could just shut down the c.c. and pay smaller amts over a larger time... They took me to court. I can't pay what they want on the c.c., but they don't want me to stop the payments on my mortgage, duh. At the end of the day, they are all one company, but they have a million outlets and wayy to many people muddling everything up. They are way too big and really have no idea what they are doing. When everything was unregulated and rolling along, nobody cared what the real numbers might actually be.

[Mike 03]

15. Kick and Rec, because HamdenRice is brilliant when it comes to explaining

these financial matters.

[MadMaddie]

16. Oh another scheme uncovered

Too bad I hope most of these companies tank.

They have been screwing the American consumer far too long.

[tbyg52]

18. Aha. Meanwhile, my CREDIT UNION Visa

just *upped* my limit. I think there's a lesson there.... ;)

[Kablooie]

22. That's just what I was wondering about -- credit unions.

I wondered if they were more stable than banks and normal credit card companies.

[girl gone mad]

19. The credit card industry hasn't lent its own money for quite some time.

They've been selling off the debt for ages. They used to get 10% premiums from foreign purchasers. Now, it's unsaleable, even at steep discounts. It didn't just start in October. They were already facing stiff competition (ironically, some of it from MBS which were considered less risky investment vehicles) and struggling to pawn off their sub-prime debt. For the last few years the CC companies have had to take more and more writedowns. That was a big reason they pushed the new Bankruptcy bill in 2005. More recently they've resorted to clever little tricks like sending bills out late and raising rates on good borrowers in an effort to tidy up the balance sheets.

[BuyingThyme]

20. This explains all of the crazy rate hikes. They're calling their loans.

They must figure that the more they raise your rate, the more likely you will be to switch your balance to another company, Of course, that's not working so well because so many "banks" are pulling the same crap.

I heard some nasty rat banker explaining on the radio the other day that the rate hikes are based on risk blah, blah, blah. B.S.

[Blue Gardener]

21. Mine just raised my limit

They sent me a letter yesterday. Somebody has money to lend.