New Rule Makes Now The Time To Settle Old Credit Card Debt Banks
Defaults on credit card debt continues to soar and it is about to get worse for the banks issuing the cards. A proposed change in a Federal Accounting Standard could jack up the default rate by a third requiring banks to increase their reserves which in turn would decrease the capital available to lend.
So what does that mean for 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.
It is a common practice of banks to bundle credit card loans into an investment vehicle and then sell them on the market. When they do this, they don’t have to show those loans on their balance sheet as they are “off the books” deals. The change in the accounting standard will stop this practice and those loans will have to be shown on the bank’s books.
Bank regulations require that a cash reserve be kept to cover bad debt on loans. However, since the off the books investment packages are not included on the bank’s balance sheet, there is no requirement to keep a cash reserve for them.
Bringing these loans back on the books is going to have a significant impact on the amount of cash a bank needs to cover the reserve. To give you an idea of the magnitude of this rule change, American Express says it will have to add $28 billion in loan liabilities while Citigroup says it will have to add over $98 billion! Didn’t we just bail these guys out?
Adding those kinds of numbers to their outstanding loans will mean that the cash reserves will have to be increased by billions of dollars. Consequently, banks are open to consumers negotiating a lump sum settlement. If a bank can get $700 on a $1000 balance, that’s $700 that they don’t have to hold a reserve on and that makes them motivated. Motivated to the point that some banks are actually calling the card holder first and they are calling themselves rather than hiring collection agencies.
There really is no downside for the consumer. By being late on the payments, the consumer’s credit rating is already damaged. If the cash can be put together the consumer can get a significant discount on their debt. However, the time to act is now. Late fees and a default interest rate of 30% are still being applied so why wait.