Card Issuers: How Can We Make You Go Away?

[Scamp]

While this article isn't telling us much that's new on what CCC's are doing along these lines, it does offer some better insight into why and whom they're actually targeting with these tactics:

http://finance.yahoo.com/banking-budgeting/article/106646/Card-Issuers:-How-Can-We-Make-You-Go-Away?

"Consumers who carried a big balance and made the bare minimum payment each month used to be a credit-card issuer's dream. Now, they are their worst nightmare.

With defaults on the rise, credit-card issuers are employing all sorts of tactics to persuade consumers to reduce their balances and, ideally, close their accounts. Some issuers are using carrots: American Express is offering some cardholders a $300 gift certificate if they zero out their balance by April 30, and Citibank is offering to match a portion of the payments some cardholders make beyond the minimum amount due. Others are using sticks: Chase is tacking on a $10 monthly fee to the accounts of consumers who have carried a large balance for more than two years."

[MattH]

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@Scamp wrote:

While this article isn't telling us much that's new on what CCC's are doing along these lines, it does offer some better insight into why and whom they're actually targeting with these tactics:

http://finance.yahoo.com/banking-budgeting/article/106646/Card-Issuers:-How-Can-We-Make-You-Go-Away?

"Consumers who carried a big balance and made the bare minimum payment each month used to be a credit-card issuer's dream. Now, they are their worst nightmare.

With defaults on the rise, credit-card issuers are employing all sorts of tactics to persuade consumers to reduce their balances and, ideally, close their accounts. Some issuers are using carrots: American Express is offering some cardholders a $300 gift certificate if they zero out their balance by April 30, and Citibank is offering to match a portion of the payments some cardholders make beyond the minimum amount due. Others are using sticks: Chase is tacking on a $10 monthly fee to the accounts of consumers who have carried a large balance for more than two years."

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Once upon a time, Credit Card Industry slang for PIFers like me was actually "deadbeats" because they don't get any interest out of us

[gpeach]

I read an article somewhere about how places that offer credit cards have to have enough on hand to cover all limits. With banks having defaults, forclosures and stock prices down I wonder how many can't match what they have out there. Then the government is to do stress tests also I read. So  are they are scrambling to not get in trouble?

Or are some just taking advantage of a prime opportunity to make alot more money raising interest rates on those that cannot simply pay it off? Having the economy as an excuse and shield to do what they want? Makes me wonder.

[haulingthescoreup]

If it is true that they have to have cash on hand to cover their total extended credit, that certainly explains all the CLD's later.

Hard to believe that it's not more like 20% of total extended credit or something, but the principle is the same.

[MattH]

And just now I got yet another Balance Transfer offer from Chase.  What are these people thinking?

[CreditAble]

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@haulingthescoreup wrote:
If it is true that they have to have cash on hand to cover their total extended credit, that certainly explains all the CLD's later.

Hard to believe that it's not more like 20% of total extended credit or something, but the principle is the same.

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@ Actually in many cases they don't have cash on hand to cover any but maybe 10% of loans outstanding. If I deposit $1,000 in a CD @ 2-5% interest the bank can create up to nine times that amount ($9,000) and lends the "created money" out at anywhere from 0% to 39% (default rate). Notice that the bank gets to charge 2,5,10,and or 39% interest rate for the whole $9,000 even though the loan is only backed by $1,000 costing less than 5%.

 A fairly good explanation of "Fractional Reserve Banking" can be found by clicking HERE. 

 A lot of the pitfalls, abuses and controversies concerning the practice can be ex[explored by reading many of the top dozen or so Google results for "Fractional Reserve Banking" (in quotes) and by searching Fractional Reserve Banking (without quotes). For further entertainment one could add scheme, scam or rip-off to the search tags.

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[MattH]

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@CreditAble wrote:

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@haulingthescoreup wrote:
If it is true that they have to have cash on hand to cover their total extended credit, that certainly explains all the CLD's later.

Hard to believe that it's not more like 20% of total extended credit or something, but the principle is the same.

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@ Actually in many cases they don't have cash on hand to cover any but maybe 10% of loans outstanding. If I deposit $1,000 in a CD @ 2-5% interest the bank can create up to nine times that amount ($9,000) and lends the "created money" out at anywhere from 0% to 39% (default rate). Notice that the bank gets to charge 2,5,10,and or 39% interest rate for the whole $9,000 even though the loan is only backed by $1,000 costing less than 5%.

 A fairly good explanation of "Fractional Reserve Banking" can be found by clicking HERE. 

 A lot of the pitfalls, abuses and controversies concerning the practice can be ex[explored by reading many of the top dozen or so Google results for "Fractional Reserve Banking" (in quotes) and by searching Fractional Reserve Banking (without quotes). For further entertainment one could add scheme, scam or rip-off to the search tags.

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http://www.time.com/time/business/article/0,8599,1852254,00.html

[haulingthescoreup]

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CreditAble wrote:

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@haulingthescoreup wrote:
If it is true that they have to have cash on hand to cover their total extended credit, that certainly explains all the CLD's later.

Hard to believe that it's not more like 20% of total extended credit or something, but the principle is the same.

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@ Actually in many cases they don't have cash on hand to cover any but maybe 10% of loans outstanding. If I deposit $1,000 in a CD @ 2-5% interest the bank can create up to nine times that amount ($9,000) and lends the "created money" out at anywhere from 0% to 39% (default rate). Notice that the bank gets to charge 2,5,10,and or 39% interest rate for the whole $9,000 even though the loan is only backed by $1,000 costing less than 5%.

 A fairly good explanation of "Fractional Reserve Banking" can be found by clicking HERE. 

 A lot of the pitfalls, abuses and controversies concerning the practice can be ex[explored by reading many of the top dozen or so Google results for "Fractional Reserve Banking" (in quotes) and by searching Fractional Reserve Banking (without quotes). For further entertainment one could add scheme, scam or rip-off to the search tags.

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Thanks --I was reasonably certain that they didn't have to have cash on hand to cover all extended credit!

[MattH]

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@CreditAble wrote:

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@ Actually in many cases they don't have cash on hand to cover any but maybe 10% of loans outstanding. If I deposit $1,000 in a CD @ 2-5% interest the bank can create up to nine times that amount ($9,000) and lends the "created money" out at anywhere from 0% to 39% (default rate). Notice that the bank gets to charge 2,5,10,and or 39% interest rate for the whole $9,000 even though the loan is only backed by $1,000 costing less than 5%.

 A fairly good explanation of "Fractional Reserve Banking" can be found by clicking HERE. 

 A lot of the pitfalls, abuses and controversies concerning the practice can be ex[explored by reading many of the top dozen or so Google results for "Fractional Reserve Banking" (in quotes) and by searching Fractional Reserve Banking (without quotes). For further entertainment one could add scheme, scam or rip-off to the search tags.

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A fundamental issue in fractional reserve banking is determining the amount of reserves based on the level of risk.  Reserving too much for safe loans means losing profits (for the bank) and losing economic activity (for the country).  Reserving too little for risky loans of course can mean very big trouble.  A major factor in the current economic crisis is that many financial institutions are suddenly being forced by the market to switch from reserving very little to reserving much more.

Political noise about "where are our tax dollars going, why are banks not turning those bailout dollars into new loans?" betrays a deep lack of understanding of market reality.  When reserve requirements suddenly increase, money that was created out of thin air will vanish, and most of those bailout dollars will be absorbed by the higher reserves needed in the current market.  The real benefit to the public of these bank bailouts is not going to come in the form of new loans, the benefit is merely a reduced chance of another Great Depression.

[Anonymous]

Hey CreditAble:

Not to nitpic, but fractional banking does not create new money.  If you deposit $1000, the bank may loan $900 and keep $100 as reserves and $900 deposit "credit" on the books (based upon a 10% reserve requirment).

However, the $900 "loaned" money usually gets deposited into a bank, as most money does.  The new deposit of $900 then creates $90 as "reserve" and loans out $810.  The $810 gets deposited somewhere and 10% is put in reserve and 90% is loaned.

In the end, this domino effect of "fractional" banking means that eventually the $1000 original depost will be kept in reserve (collectively) between all of the banks who received a portion of the deposits, and $9000 in new credit money is created.  But it is not the bank who received the $1000 initial deposit that creates $9000.  It is the effect of being able to put the deposit on the books while only holding a fraction in reserves.  The "credit" money is the money the bank has on the books, but not in reserve.