The American Bankers
Association (ABA) recently posted statistics concerning
delinquent credit card payments. The data indicates a continued high delinquency
rate, which in turn leads to lower credit scores since past payment history accounts
for about 35% of one's credit score. The more recent a tardiness, the more
credit score points are sacrificed. A consumer could be 30, 60, 90 or more days
late on an account and the impact on his or her score becomes progressively more
pronounced. Logically, a history of late payments on several accounts will cause
even more damage than just a single account. The good news is that by paying your
bills consistently on time, you can greatly improve your overall score.
In a
press release by the ABA, the ABA's chief economist, James Chessen,
suggested 4th quarter gas prices and stronger economic indicators "leaves me hopeful
that delinquencies will continue to fall." But he conceded that the adverse impacts
of a string of devastating Gulf Coast hurricanes have yet to be fully felt on consumers'
pocketbooks.
Chessen predicted that
the hurricane impacts were likely to be spread out over the final three months of
2005 and the first three months of the 2006. The statistical analysis is not yet
compiled and remains to be seen.
But I wondered if delinquent payments might be impacted further by adding three
other concerns.
- Federal guidance to increase minimum credit card payments as illustrated in the
recent article
Confusion Rampant
- The advent of the new bankruptcy law as demonstrated in the article
Affect of New Law
- The normal Christmas holiday spending spree by consumers as discussed in the article
Holiday Spending
Fully aware that even ABA was "crystal balling" the future, I asked Linda Sherry,
Director of National Priorities at Consumer Action, if she anticipated holiday
spending to affect this delinquency trend.
"Every year there are people who
complain about credit card hangover after the holidays. Our complaints don't really
show a spike [after the holidays], just continued complaints about unfair treatment
to folks with large balances.... I see these as 'captive customers' who can't jump
to another card, so the [card] companies do what they want."
I also asked if Consumer Action saw the
Federal guidelines of increased minimum payment affecting this trend.
"We have seen some complaints about
this and the ones we have seen are pretty shocking. One guy's minimum monthly payment
jumped from $282 to more than $800! Obviously he had a large balance..."
Naturally, we will have to wait for the official reports
on whether credit card delinquencies will rise or fall in 2006. One thing seems
certain, though. Even if delinquencies fall, they will certainly negatively affect
our economy for some time to come. Furthermore, we can be sure that delinquencies
can stagger our personal budget with many late fees hovering around $30.
Unfortunately, the effect of delinquencies on consumers goes far beyond late fees.
Interest rates on many delinquent accounts
quickly soar to above 30% and
remain there as long as the creditor chooses. Finally, because of
universal default policies, being delinquent
on one card can trigger penalty rates on others, even if your payments are current
on your other cards.
The bottom line is,
even if all you can do is pay the minimum payment, DO IT!
By
Mike Killian,
CardRatings.com Debt/Credit Management Reporter