Neither a borrower nor a lender be. If you’ve been reading the news lately, this other famous line from Hamlet probably rings true. The current financial crisis is putting a strain on one of America’s favorite sources of easy funds: credit cards. Even before the crisis hit, some banks were raising fees and establishing “penalty rates” for late payment; now those already high rates are jumping to as much as 36 percent annually, and many banks are lowering or even closing credit lines without warning.
Unfortunately, this situation is especially tough on everyday Mauians, many of whom have lost their jobs or seen their hours slashed due to painful drops in tourism. For people who are just keeping up with their bills, one payment arriving a day late at the Mainland processing center can now double the monthly credit card tab. That can be a financial back-breaker.
Although the news is filled with doom and gloom for banks, it’s time to start questioning whether most banks actually need to raise their rates. There were only 171 banks on the FDIC’s watch list at the end of the third quarter out of almost 9,000 in the U.S. Comparatively, more than 1,000 failed during the savings and loan crisis.
Also consider that the fed funds rate is at 1 percent, matching the lowest in history and creating the largest-ever disparity between rates and what it costs banks to borrow. Add the fact that 90 percent of all credit card accounts are held by just 10 companies, few of which appear to be in financial trouble, and you begin to wonder whether healthy banks are using the crisis as a cover to increase profits unreasonably.
Faced with this, what’s a smart Mauian to do? Well, regardless of whether your bank is actually in distress or just hiding behind it, if they’ve ever warned you that they’ll raise your interest rate if you pay late, follow these steps to ease your way:
• Don’t pay late. A single day makes a difference. It gets worse if you’re late 30 days because then other banks can raise your rate when it appears on your credit report
• Keep good credit. Banks can also raise rates if your credit score goes down for other reasons.
• Set your credit cards up on automatic payment, so you don’t miss a payment. This is especially important given the mail lag between here and the Mainland.
• If you are late, ask your bank not to impose the penalty rate.
• If one is imposed and they won’t waive it, strongly consider canceling that card immediately. You’ll still be able to pay it off over time.
Also, read the rate and penalty sections of all your credit card agreements carefully and consider closing accounts and transferring balances to friendlier ones. Obviously this is easier before you get into financial trouble, but is still possible even if you’re struggling.
OK, all that being said, here’s something to remember: Despite the recent bad news and the struggles and debt many are facing, the fact is that the creation of capital and credit markets was one of the keys to our country’s success. This is because for the first time tremendous funds could be collected together and invested in worthy enterprises like railroads, steamships, manufacturing, etc. that strengthened our economy and ultimately improved our quality of life.
This extends to individuals as well: without credit a limited number of Americans would be homeowners, and far fewer people could ever hope to buy new cars or start small businesses.
So credit is primarily a force for good, not evil—especially when it’s used for acquisitions that give value for years, like a home. However, like all good things it must be used in moderation.
One of the best metaphors for the current financial crisis is the country, and the entire world, waking up with a hangover from a credit binge. Now all of us, borrowers and lenders alike, need to learn to indulge more carefully. MTW
Doug Levin is a Maui-based CPA.