A Credit Card Meltdown?

Posted by: Gene M. | Dec 29,2007


The credit crisis is going to get increased attention in 2008.  2007 was the year of the subprime mortgage meltdown.  I’ve written here before how the credit card industry does not face the same threat as the mortgage industry because credit card debt is so much lower than any mortgage.  Also, there’s the fact that housing value is going down, which is core to why so many subprime borrowers ran into difficulty.  This issue does not quite have a parallel in the credit card industry.  

Still, a default is a default, so if thousands of people are not able to pay off their credit card bills, this could have major repercussions.  Yes, it’s not the same as a $100,000 mortgage, but because banks are already reeling from the mortgage crisis, an additional credit card crisis could be the straw that broke the camel’s back.  Even if bank’s benefit from defaults by raising interest rates and potentially bringing in more money long-term, this won’t matter if that interest is never paid.  This could be the case for a growing number of credit cardholders.  Just as banks are reeling from mortgage problems, so are those homeowners.  They weren’t able to pay off their mortgages, and credit cards are next in line.   

I’m kind of being a devil’s advocate here, painting the worst case scenario.  I don’t for a second believe that the entire credit card industry is going to fall apart.  But it’s not entirely healthy either.  The trouble is that I could recommend that you save more money as a way to weather future problems in the economy.  The Catch-22 is that if people don’t spend money, this could spur a weakening economy.  That’s what makes a weak economy so volatile.  Paying off your debt, though, is better overall than not using your cards for new purchases, as you’re paying out money to the banking industry, so I’d recommend paying off your debt being a first priority.  

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