Tuesday, September 04, 2007

The Sharks Circle

Remember that onerous bankruptcy bill that our GOP friends forced through the Congress a while back? You know, the one that was passed to protect the poor credit card companies and make it harder for us regular folks to declare bankruptcy. Well, it seems that with all the trouble in the subprime mortgage market the big credit card issuers are seeing an opportunity.

As subprime borrowers began to default on their mortgages in rapidly growing numbers this year, credit card issuers increased their efforts to sign up such customers with tarnished financial histories, according to a market research firm.

Direct mail credit card offers to subprime customers in the United States jumped 41 percent in the first half of this year, compared with the first half in 2006, according to Mintel International Group. Direct mail offers targeted at customers with the best credit fell more than 13 percent.

Yet, during this same period, defaults on subprime mortgages, which charge higher interest rates because the borrowers' blemished credit makes them bigger risks, rose significantly. In June, nearly 1 in 5 subprime mortgages were at least 60 days past due, and more than 1 in 20 were in foreclo sure, according to First American LoanPerformance, a San Francisco firm that collects and analyzes mortgage data.

Though it seems counterintuitive to extend credit to households already struggling with debt, the meltdown in housing and mortgage markets probably led credit card issuers to boost their marketing to subprime customers, said Julie Lizer, Mintel's manager of custom research.

Ones initial thought is "Why would these big companies want to extend credit to people who are already in financial trouble and are, in fact, poor credit risks?". If you reflect upon the current bankruptcy law you'll see why.

These companies can extend a very small credit line to these people, say $250 - $500. Chances are that these people, being desperate, will use whatever credit they have to just try and get by. They, of course, will not be able to make the payments in many cases and the credit card companies will begin tacking on late fees and interest and interest on the late fees and it will snow ball into a mountain of debt in very short order. Now that is so much harder to find relief from debt in the courts these people will just drown. The credit card companies, for a modest investment, have created vast accounts receivable that they can use just like cash in the bank. This kind of thinking is the same root cause of the melt down in the mortgage market and just another card in our house of cards economy.

These folks are real bastards and it might be time to have a rethink on the bankruptcy law as well. The credit card issuers have way too much power and don't deserve protection when they they pull off crap like this.

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