Credit 2010: The Strong Will Always Carry For The Weak

Most taxpayers know all too well that they are the ones left with the costs for the cost of bailing out the banks following the recent credit crisis. But Britons, Americans, Canadians, and just about everybody around the globe are being caught up in the fallout of the bursting of the credit bubble in more ways than they may realize. The shock that credit card interest rates are at a 12-year high, in spite of the 350-year low at which base rates remain, is another matter all together.

Why has the cost of borrowing on a credit card risen so high over the past few years, you may want to know? Their days are soon numbered for those good people who have been paying off their credit card bills in full and on time. Those folks, although it was deemed the best practice to do, are being smacked for the people who are less than credible. Basically, the good are being punished for the bad. In essence, they are the ones who are compensating for those folks who are not paying back to the lenders.

All of the major lenders have reported increasing defaults since the recession took hold of the UK, the US, and Canada, since the world wide economic crash. For each percentage point rise in unemployment leads to a one percentage point increase in defaults from prime credit card customers, increasing to 1.2 per cent for sub-prime customers. With unemployment having risen from just over 5 per cent at the beginning of 2006 to just fewer than 8 per cent today, you can see the lenders' sweaty brows.
What does mean for us regular folk? It is quite simple: these higher credit card rates shows that lenders (and the credit industry) have been very quick to share their problems with customers. The cost of all those unrecoverable debts is being passed on to other credit card borrowers.

Again, it falls on those who have been good little guys and gals to pick up the slack from the naughty which coincidently far outnumber the good. Something very similar has happened in the unsecured personal loan market, by the way, where rising defaults have significantly pushed up the cost of this type of credit too. Wow, there is little shocking news here people. Although folks try their hardest to get ahead, there are several factors that stand in the way: job loss, job cut-backs, pay cut-backs and shortage of work, which many have lost or felt during the economic, melt down.

Maybe it is not so surprising that the banks pass on the cost of default to customers, but it does make you think again about their behavior during the credit boom. Lenders were almost giving away out money to most people, including to those whose credit was less than desirable at the height of that economic glory. When those people started to miss and defaulted on their loan payments, lenders' and the credit industry as a whole began to realize that it was not in their interests to lend money to people who couldn't afford to pay it back. Actually, this is far from the truth, as it now turns out.

If a bank, or a creditor knows it can get back the losses it incurs from bad debt or at least a good chunk of it from loyal and good customers, then it doesn't have to worry quite so much about who it lends to in the first place. The Banks, lenders and the credit industry are pretty slick when planning this all out. Since there are more people out there who are risky at repaying their debts, Banks, creditors and lenders will continue to make very good business.

It's a interesting business model that uses the best customers hauling the cost of those that have less ability in maintaining an ongoing healthy financial relationship. But this has long been how the financial and credit industry has operated.

A great example to expand on this thought is:
Longstanding (or fixed/ term) mortgage customers who didn't switch to a new lender paid through the nose to fund much more attractive deals that were offered to new customers. Only open only to new tend to have great incentives and the best savings account deals are regular these days, such as with introductory bonus interest payments available for a short period but off limits to existing account-holders.

To draw a reasonable conclusion from all of this: No matter what you do as far as paying off your credit debt, or all loans, you will get nailed from the credit industry, banks, and the entire financial sector. These industries are in the business of making money-plain and simple. It really sucks for those who are being great, and paying off what you need to pay off. Because of your great actions, you are getting the short end of the stick. We are not suggesting becoming bad, just to know that you are paying for those who are not. Lastly, banks, financial and the credit industry have been making their money on the weak, but can always rely on the strong to carry them throughout any economic situation.