Here’s A Meltdown We Can All Enjoy
By Jason Kenney | Saturday, October 18th, 2008 | PolicyForget the mortgage crisis that is based on 3% of American’s being irresponsbible and defaulting on their loans. The one that might have a greater impact is the coming Credit Card Meltdown:
Some more troubling details from the Red Tape Chronicles:
- Outstanding credit card debt has grown by more than 75 percent since 1999.
- More than 50 percent of Capital One’s cards are “low-limit” cards, which Innovest said are designed as fee traps — consumers with low limits are more likely to surpass those limits and face penalty charges. (CEO Fairbank maintains that low-limit cards are simply a smart way to manage risk)
- Risky borrowers with low credit scores — subprime borrowers — account for roughly 30% of outstanding credit-card debt.
The good news? The credit card market is tiny compared to the housing market, so a “subprime credit card meltdown” wouldn’t have the same effect as our current housing dilemma.
Capital One’s in trouble. But they’re surely not alone. And if credit card companies need to make up the money they are losing elsewhere, you can surely expect fees and rates to jump up across the board to make up for losses, so even those with good credit records may have to pay for those with bad.
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About the author
Jason Kenney has blogged at J’s Notes since 2001, is the director of RedStormPAC providing online fundraising for Republican candidates in Virginia, and co-founder of K6 Consulting. He is a graduate from Virginia Commonwealth University and resides in Richmond, Virginia.
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5 Responses to "Here’s A Meltdown We Can All Enjoy"
I’m no businessman, but i heard something the other day that seemed to me to illustrate a fundamental disconnect. A small business owner was being interviewed on the radio, regarding the economic crisis. At one point, when asked about the causes and impacts of the crisis, she started off talking about how sad it was that people like her who lived responsibly and within their means we suffering due to a crisis caused by people who bought more house than they could afford, and got risky loans to do it. She then went on to lament that her business was facing tough times, as it looked like her corporate credit account would likely have its interest rate raised, and she used credit to pay her payroll and keep the business running, as her receivables were usually 30-60 days out.
In personal finance, the base goal is to have enough cash on hand to pay your bills, and them some for unexpected emergencies. I realize in large scale corporate America having too much liquidity is considered a poor utilization of resources, but why on earth in a small business wouldn’t you have some form of cash reserves to actually run your business on?
Jeremy,
I agree with you that the goal should be to not have to rely on credit to meet payroll. But when you are just starting out, unless you already have a large wad of cash from the opening bell, you have to rely on credit.
Take trucking. You deliver the load and you should be paid for delivering it, right? Nope. The shipper (or perhaps the consignee) has 30 to 60 days to pay up. Even if they are flush with cash they are going to take every bit of the time allowed to pay you because they can continue to earn interest on the money in the mean time.
The small business man, just starting out, has the revenue in the pipeline but the workers are not going to understand that they have to wait for their paycheck.
I understand the just starting out aspect. But this lady sounded like she’d been in business a while, and currently had like 30 employees.
No doubt starting a business (depending on the model) can require a substantial capital investment, which means it’s common to get small business loans and such. And repaying those i imagine would be a priority. But it seems to me one of the first goals would be to build up a decent amount of cash reserves to operate the business from, to reduce the reliance on credit. After all, you will have cases where this or that client is late in paying you, and the less money you expend on interest the greater the profit. This may be more feasible in service industries that don’t rely on keeping an inventory.
But then, though I’ve spent many years working for small businesses, I’ve never been involved on the finances side, so what do I know.
Jeremy, part of it is the ability to grow as a small business sometimes requires an infusion of cash above and beyond that the company is making at this time. A business with 5% growth may not see the raw income needed to expand the business to maintain that growth rate, but they can certainly pay back the loan over time to do so. Loans also provide a way for there to be cash while balances are still being worked out: a business may be secure in knowing they did well last quarter but have to wait for everything to settle with the accountant before they really can get to their money, but their bills are due, payroll is due, and a loan might be the only way to get through. Loans also provide the backing needed to ensure proper readiness for a busy period, such as Christmas, and are usually paid back after that rush.
Certainly a business should want to be at the point where they don’t need loans to get by, but there are many times when small businesses don’t have the large pool of capital backing them up that larger corporations do and in order to compete with those corporations they need that temporary influx of cash that allows them to flex their muscle and make it through another quarter.
What I don’t understand is, if the credit market is SO bad that we need to spend $750 billion in taxpayer money to bailout corporations, why am I still getting credit card offers in the mail on an almost daily basis? They’re GOOD offers too, for cards with big limits. I even received one today from Washington Mutual, which is one of the banks that recently went under…
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