Out Debt Out!

This post by Flyingifr originally appeared at Debtorboards on November 3, 2009. It is a succinct commentary on the current credit crisis and how lenders are likely to discover that the “Law of Unintended Consequences” can hurt when it is applied to them and their business model.

The link to the original post:   http://debtorboards.com/index.php/topic,8736.msg62516.html#msg62516

The post is used with the express permission of the author.

Flyingifr wrote:

Lenders – beware the coming storm

With the current recession and credit crisis, the news media is beginning to note a cosmic shift in people’s attitudes towards credit. No longer are credit cards being looked at as a universal necessity – they are once again being looked at as a luxury.

I am also seeing a shift in attitudes on both sides of the equasion. Loyalty is history. Lenders, who used to value long term relationships with their customers are now looking at their customers as cash cows and when the cow doesn’t give enough milk it is sent to the slaughterhouse to be turned into hamburger through rate jacking, credit line decreases or simple unannounced account closures.

I remember the days when bankers encouraged you to have a long term relationship with them. My Debit Card attached to my bank account still reads “customer since 1996″, but my credit cards no longer do. American Express still does that, but after a rate jacking and 4 credit line decreases in six months on an account that was never delinquent by one dollar or one day that account was closed within 14 months of its opening. Amex made no attempt to keep me as a customer and actually paid thousands of their customers to go away. The other credit card companies are in the same boat. Citibank made no attempt to salvage our relationship, neither did GEMB.

It is easy to ascribe this to the current credit crisis, and that is probably a correct assumption, but what is happening to the concept of “loyalty”? Loyalty is a component of trust, and the credit industry is built on trust. Lenders trust borrowers to repay and borrowers trust lenders to be honest with them and to honor their commitment to lend. Stories are legion of people at checkout counters across the land attempting to use a credit card that they thought had plenty of available credit only to find there is none after a quick and unannounced decrease in credit line. I am not talking about accounts that are delinquent in payment – I am talking about accounts that are current, have always been current and in many cases actually have no balance owed at all.

Lenders say “it’s a business decision” and they are correct. But that goes both ways, and this is where I am sure the collectors will argue with me. How many of us have heard collectors cajole us towards repayment based not on the “business decision to repay” but on the “moral” argument – you have a moral commitment to repay. It’s as if one side of the transaction is an amoral “business decision” when made by a lender and the other is a “moral imperative” when made by a consumer. “Yes, we raised your interest rate to 30% and cut your credit limit to $5 above your balance with no advance notice, tripled your payment, changed your due date and there is nothing you can do about it even though you have been a customer of ours for thirty years and have never made a late payment, but your payment is now five minutes late. Here’s your late charge and we dinged your credit.”

OK, so it may not actually be THAT draconian, but many people feel it’s pretty close to that, and many are angry. How angry? I see a storm coming that the lenders are powerless to stop and may end up hurting them big-time.

If credit is reduced to simply an amoral “business decision” what happens when BOTH sides of the transaction see it that way? The moral imperative to be honest goes out the window and only what is expedient and can be “gotten away with” will happen. Let’s discuss someone I know and we will call her Jenny. I personally know about dozen people who fit Jenny’s profile and the number is growing daily.

Jenny is in her late 50′s. She has a six-figure credit limit spread among a half a dozen credit cards. Her utilization is about 20% and makes her payments consistently above the minimum and on time. Her FICO’s are all in the mid 700′s. She has a six-figure household income, owns her home and has three paid for cars. Her children are all grown and she is preparing for her retirement. She has two pensions fully vested and a solid investment portfolio.

She has also had $75,000 in credit lines reduced in the past year and has had four credit cards closed unannounced. She feels she plays by one set of rules and the lenders play by another. She is right – she plays by the “moral imperative” set of rules and the the lenders are playing by the “business decision” set.

That is about to end.

Her plan: To retire at age 62 – as soon as she can collect her pensions and Social Security and move to the Philippines. She will sell her paid for home to her child before doing anything. By that time her investment portfolio will be in the low six-figure range, and her combined pensions and Social Security will allow her to live like royalty in the Philippines. Did I mention that she plans to hit all her credit cards up to the maximum before she leaves, and not pay them back? She won’t need them in the Philippines, she will have enough cash for whatever her heart desires. She doesn’t care what happens to her credit rating in the US, she will be in the Philippines. Or Brazil. Or Singapore. Or Korea. Or Mexico, Belize, Costa Rica or anywhere else in the world, even Nova Scotia. “It’s not personal, it’s business.”

Collectors will skip trace her, maybe they will find her, maybe they won’t. If they do, what can they do? Her pensions and Social Security will be Direct Deposited to a bank in the Philippines. Her assets will be in Treasury Bills. The Treasury will mail her a check every six months for the interest. None of which can be touched by bill collectors. Is she alone in making these plans? No, I know of a dozen like her and several who have already done this. The numbers will grow and with each one the lenders will get hit hard. In Jenny’s case for $100,000. The new morality is “it’s just business.”

Lenders – you created this environment. I hope you enjoy it.