New Rule Makes Now The Time To Settle Old Credit Card Debt Banks

Defaults on credit card debt continues to soar and it is about to get worse for the banks issuing the cards. A proposed change in a Federal Accounting Standard could jack up the default rate by a third requiring banks to increase their reserves which in turn would decrease the capital available to lend.

So what does that mean for the consumer?

Consumers who are behind on the bill from their credit card should seriously consider contacting the bank and negotiating a discounted settlement. Using a credit counseling service is a good idea so the offer is reasonable and there is a plan in place to pay the settlement. Savings of thirty to forty percent or more are possible.

Because of a change in the FAS, banks will be required to bring “off the book loans” and put them “on the books”. It has been a common practice for banks to bundle credit card loans into an investment vehicle and sell them to the market. These loans, because they are investment vehicles, did not have to be shown on the bank’s balance sheet.

Banks that are FDIC insured are all regulated. Part of that regulation requires that banks keep a cash reserve equal to a percentage of all loans lent as a reserve against bad debt. Off the books loans were not included on the balance sheet so the banks did not have to have a reserve set aside for them.

Bringing these loans back on the books is going to have a significant impact on the amount of cash a bank needs to cover the reserve. To give you an idea of the magnitude of this rule change, American Express says it will have to add $28 billion in loan liabilities while Citigroup says it will have to add over $98 billion! Didn’t we just bail these guys out?

Adding those kinds of numbers to their outstanding loans will mean that the cash reserves will have to be increased by billions of dollars. Consequently, banks are open to consumers negotiating a lump sum settlement. If a bank can get $700 on a $1000 balance, that’s $700 that they don’t have to hold a reserve on and that makes them motivated. Motivated to the point that some banks are actually calling the card holder first and they are calling themselves rather than hiring collection agencies.

If a consumer is already behind on their credit card bill their credit score is already trashed. There really is no downside to negotiating a discounted settlement providing you have the cash to do it. Credit counseling organizations can provide ideas on how best to handle the deal. This could be a time where the consumer can eliminate some serious debt.