What if every person who has credit card debt just stopped forking over cash to the credit card companies on the same day or same week? Would credit card companies instantly crumble? Mass chaos, end-of-the-world-as we-know-it type stuff ensues?
No more credit cards!
Sounds like a plan to me.
If you want to look at real-world parallels, you can read up on people defaulting on mortgages and every other type of bill en masse in the Gulf Coast area post-Katrina. They are trying to find ways to make it work.
The card companies and banks would hit the global capital markets for some short term liquidity, start assessing fees on cardholders, repo their stuff and then sell the debt to asset recovery companies at a discount. Those firms would harass you for a while and eventually file suit probably resulting in having your wages garnisheed to pay off the debt.
The end result would be that lawyers would make a truckload of cash from the suits and I would buy a mansion in Malibu with all the money I made buying stock in collection firms. The folks who refused to pay would have less money then they would have if they had just paid after legal fees and late payment fees are considered. And banks would eventually get rich charging higher interest rates to all the new credit-impaired citizens.
Admittedly, bank stocks would spend some time in the crapper while this scenario works itself out. Of course that would only hurt just about anyone with a private pension, 401k or 529 savings plan.
Sounds like a good plan, let me know how it works out. Just give me some warning so I can load up on collection agency stocks and short the big bank stocks.
I guess the credit card companies would even make money off it, as the interests you pay on outstanding balances are usually higher than the market rates the CC companies would have to pay for liquidity. Maybe the companies would have to pay somewhat more than market rate (risk premium and sudden demand for short term cash driving interest rates up); but the large financial institutions backing credit card issuers are rather creditworthy, not to speak of the fact that sooner or later they will get their money anyway by suing their debtors to death. Besides, there’s LOT of money available on the international markets, so I doubt the companies would pay rates that would come even close to the interest rates they charge their customers. Some bills might be left unpaid because there’s no money to be taken from cardholders who are broke, but all in all they could rake in nice profits after some transitory liquidity shortages whch they would overcome.
I assume you mean stopped paying forever.
The credit card companies would go broke and those who have invested their money to be lent out at 25% interest would lose their money. That’s all.
In the long run, lack of credit cards would be equivalent to an enforced savings rate. So instead of buying music, clothes, food, etc today on credit and paying off over the next month, consumers will be forced to buy only what they can afford now. If you don’t have quite enough, hope your family or friends can cover you until your next paycheck, because the banks won’t.
This system works fine in many places in the world. Everyone (in the middle class) has a large savings that they use to pay for day-to-day living expenses. The poor are screwed as usual.
I do not agree with this hypothesis. They will be in a world of financial hurt, and some might go broke, but the stronger ones can make it through it. If absolutely everybody stopped paying their credit card bills, all the CC company has to do is use whatever capital is has (and whatever capital they can line up) to go after all of the deadbeats. First step is that all the credit cards will stop working. Second step, all your stuff is going to get repoed and auctioned off to cover your bill, unless you declare bankruptcy. Depending on your locale, your wages might get garnished to pay the CC company until your debt + fees + interest is paid off.
The companies that get enough money from reposession and bankruptcy courts to stay afloat can quickly attempt to change their business model to be auto or mortgage lenders, if nobody is using credit cards. Or just distribute a large dividend, give good severance packages and fold.
The bottom line is that if EVERYBODY (except me, I’m not going along with this shit unless you pay off all my credit cards first) stopped paying their CC bill, they would mostly be hurting themselves. It’s the equivalent question to “What if everybody stopped going to the doctor?”. Well doctors will go out of business, but so many people will die or suffer that it’s relatively minor problem that doctors need to find a new profession.
I agree with groman. The happy medium for a credit card company is between someone paying off the balance every month (they still make a percent from the vendors who accept your card) and someone completely defaulting on their payments. They want you to carry a balance, pay interest, turn in your payments late and rack up late fees, etc. But they want you to pay.
If everyone didn’t it, that would not be their preferred outcome, but they would still have everyone by the balls, especially now that the new bankruptcy laws are in force. Under the OP’s scenario, presumably a lot of people are able to pay but simply refuse; that is, flat-out deadbeats. The CC co’s would make short work of them, getting court orders to garnish wages and charging enormous interest all the while.
It’s a good thing for the credit card companies that they have several billions of dollars sitting on their balance sheets in the Net Loss Provision line.
===Aeschines said
If everyone didn’t it, that would not be their preferred outcome, but they would still have everyone by the balls, especially now that the new bankruptcy laws are in force. Under the OP’s scenario, presumably a lot of people are able to pay but simply refuse; that is, flat-out deadbeats. The CC co’s would make short work of them, getting court orders to garnish wages and charging enormous interest all the while.
===End Aeschines said
Don’t be so certain they would be able to collect as much as they’d want.
Wage garnishments for private debts are illegal in some states, and limited to certain percentages of income and also by income levels.
Seizing real estate and other property is another common tactic, but there are limits on what can be done with this, too… and it doesn’t work at all against America’s typical consumer today, who has virtually no equity or savings anyway thanks to his overspending lifestyle.
The costs of collecting these debts are very real, too. Hiring an attorney to get the initial judgement against the creditor and then get the garnishment started will absorb a substantial chunk of change, and is not even a sane action for account balances much under $1500.
There’s the other issue of how ridiculously overloaded civil courts would get with the case load. It’d be like what would happen in the criminal system if EVERY DEFENDANT plead not guilty and had a lengthy trial.
This would also cause a lawyer shortage, driving up banks’ legal bills even further.
Heck, I’d almost pay to see that happen, just out of the amusement I get from watching people get frustrated and start to bitch and fuss.
In any case, we’re not looking at 100 cents on the dollar recovered. 75? 50? 25?
Remember that the less affluent half of Americans can STILL qualify for an old-style Chapter 7 if they need to.
===Maeglin said
It’s a good thing for the credit card companies that they have several billions of dollars sitting on their balance sheets in the Net Loss Provision line.
===End Maeglin said
I’ll guarantee not a tenth of lenders have the liquidity needed to survive a crisis of this fashion.
When an account goes far enough into collections, it gets sold to debt collectors at a nickel on the dollar.
That gives you an idea of how recoverable much unsecured debt is.
This being said, some banks have more of their portfolios tied up in credit cards than others. Those who have more of their assets deployed in auto notes, stock, bonds and mortgages might be able to write off their losses.
The part about the OP’s scenario that really sucks isn’t the credit card companies busting. I and quite a few other Dopers do have substantial money tied up in CC lenders, so losing that investment would suck, but my biggest problem would be when the bank that has my checking account failed due to its credit card assets failing to perform. Sure, I have FDIC coverage for every dollar, but the FDIC would have to either bust or wind up calling on Congress for aid, which means mammoth new taxes next year. Plus I bet I wouldn’t get my reimbursement from the FDIC overnight. The wait to have my accounts handed back to me would be teh suck.