The UK government has secured a promise from credit card issuers to give struggling borrowers a small reprieve, according to the Wall St. Journal. Under the plan, debtors who are currently in discussion with a not-for-profit debt advisory service will have collections activity against them suspended for 30 days, with the option of an extra 30 days if the advisory service can prove that progress is being made.
From the Journal story:
The agreement came after Peter Mandelson, the minister for Business and Enterprise and Regulatory Reform, and Consumer Affairs Minister Gareth Thomas met with representatives of around 12 credit-card firms and their trade organizations Wednesday afternoon.
The U.K. government, which has taken stakes in three of its biggest banks and fully nationalized two mortgage lenders, is looking at ways to coax banks into lending more to companies and consumers. In recent weeks, government officials have complained that bankers are failing to pass on the Bank of England’s interest-rate cuts to consumers. They have also been pushing all types of lenders to give struggling debtors more time to repay.
Call me cynical, but I can’t help but wonder at the banks sudden spell of generosity. With credit card charge-offs increasing at breakneck pace, it seems to me that this ‘plan’ is more for their benefit than ours. The truth is, banks are freaking out right now. Unlike a mortgage or an auto loan, credit card debt is unsecured debt. If a customer defaults, the banks have no real way to retrieve their money and that loan is essentially written off or sold to a collections agency for literally cents on the dollar.
And defaulting they have been. Charge-offs and delinquencies have nearly doubled in the last two and a half years, and things are only just getting started. See the chart below (click for sharper image) that I created with data sourced from the Federal Reserve:
Of course, this is still well below the 7.85% peak in the first quarter of 2002, but the chances are that record will be beaten – and beaten badly – some time in 2009. Banks know this, and in an attempt to stem the losses, they’re trying to get as many people onto payment programs as fast as they can.
In essence, this 60 day ‘repreive’ is actually a bribe.