1) Get out of debt.
2) Build savings.
Here I am, over six years later, and every week's mail brings me more and more evidence that being debt-free (except for the mortgage!) is the way to go. (Future bailouts and debt jubilees notwithstanding.)
Take, for example, this notice from Citibank, which we received just last week:
NOTICE OF CHANGE IN TERMS AND RIGHT TO OPT OUT
THE CHANGES. We are changing your card agreement. The changes will be effective for all billing periods beginning on or after December 3, 2008. The changes will be effective whether or not you receive a billing statement.
• We are increasing your variable APR for purchases. Your purchase APR will equal ... a minimum APR of 16.99%.
• We are increasing your variable APR for cash advances. Your cash advance APR will equal ... a minimum APR of 21.99%.
• We are increasing the default APR to equal the greater of (1) the U.S. Prime Rate plus up to 23.99% or (2) up to 29.99%.
THE CHANGES. We are changing your card agreement. The changes will be effective for all billing periods beginning on or after December 3, 2008. The changes will be effective whether or not you receive a billing statement.
• We are increasing your variable APR for purchases. Your purchase APR will equal ... a minimum APR of 16.99%.
• We are increasing your variable APR for cash advances. Your cash advance APR will equal ... a minimum APR of 21.99%.
• We are increasing the default APR to equal the greater of (1) the U.S. Prime Rate plus up to 23.99% or (2) up to 29.99%.
There's more (ain't there always?) regarding increased surcharges for foreign purchases and so on, but for Joe Sixpack, the explosive stuff is above.
For my part, it's been pretty engaging to watch, on a blow-by-blow basis, the effects of massive economic deleveraging — of which I'd consider such term changes a part. It's not nearly so neat, of course, if you're carrying balances on your plastic. If that's the case, then the benefits you're seeing from $2/gallon gas just got vacuumed up by Citibank.
On a carried balance of $4k, your monthly interest tab just went from $33 to $56.
On a balance of $10k, your monthly interest charges just climbed from $83 to $142.
It should be noted here that Citibank (whose stock now trades in the single digits, at a price last seen in 1996) is instituting the above changes under no small anchor of duress. The federal government is doing what it can to shove rates lower; banks are doing what they can to ensure consumer rates move higher. They're tightening terms and limits on a wide basis so that even "good credit risk" folks like my wife and I (credit scores @ 800-ish; last late payment was early 1990s) get to "pay" for the profligacy of (1) other consumers, (2) the banks themselves.
Personally, I don't care a whit that the minimum rate on my Citi Dividend Mastercard just went to 16.99 percent. With no non-mortgage debt of any kind, I use the card for the cash rewards and pay the thing off every month. In this regard, Citibank provides me little more than a convenience. Raising my rate is a big fat charbroiled Nothingburger.
On the other hand, if credit-card securitization continues to meet auction failure, then all bets are off. From the Marketwatch story above:
Earlier this month, Citigroup said that it lost $1.4 billion in the third quarter from credit card securitizations and that it expects such losses will continue, possibly reaching record levels in 2009.
The result compared to a gain of $169 million from credit card securitizations in the year-earlier period.
Those comments showed that Citi, like other firms, was unable to package up, or securitize, the loans it makes to customers and sell them into the secondary market.
A higher interest rate would make the difficult-to-sell loans more attractive for secondary market buyers, as well as make them more productive should Citi have to keep them on their own balance sheet.
The result compared to a gain of $169 million from credit card securitizations in the year-earlier period.
Those comments showed that Citi, like other firms, was unable to package up, or securitize, the loans it makes to customers and sell them into the secondary market.
A higher interest rate would make the difficult-to-sell loans more attractive for secondary market buyers, as well as make them more productive should Citi have to keep them on their own balance sheet.
High-FICO, convenience-only card users (like me) who can't imagine (not like me) their plasti-credit lines largely vanishing altogether in the midst of economic turmoil might do well to consider just that eventuality.
Given what's occurred in the last year or so, I for one have learned to shun the words, "Oh, there's no way that can happen."
Labels: Credit Cards
