U.S. credit card defaults up, signal consumer stress

Summary

It is hard to deny that credit cards are becoming more and more widely used, offering finances for buying anything from groceries to a new television set. However, this article reveals that even though consumers may be experiencing the ends of the recession, US credit card defaults are still constantly rising. In fact, the credit card debts from Bank of America Corp and Citigroup Inc. customers are at is peak since the beginning of the recession. Expecting a V-shaped recovery in the economy, customers become too confident in the state of the improving economy, leading to charge-off rates as high as 14.54% for the Bank of America. As a result of the rise in credit card losses, credit card companies have closed millions of accounts and cut down on lending limits and rewards.

Connection

In Accounting 11, we learned that buying and selling on credit is a convenient way to do business. By delaying payment for a short period of 30 days, purchasers are given the time to examine the goods or return them before paying for them. For example, when a company purchases supplies on credit, an account called the Accounts Payable is created under the name of the credit, the person or business the company owed money to. When credit card debts are paid on time, the process is smooth and convenient. However, when a company never receives the money owed to them, they have no choice but to write-off the account, making it no longer an asset value and assuming that the money most likely would not be returned, which results in a loss to the company.

Reflection

In recent years, I have noticed that more and more people are using credit cards instead of cash as a form of payment due to its convenience. Programs such as “do not pay until” a certain date are introduced, allowing us to walk away without paying a cent for our purchase. As if the idea of a credit card wasn’t luring enough, rewards attached to various cards spark customers’ interests. To encourage consumers to pay for their credit card bills early or on time, credit card companies are introducing interest rates for those who pay for the bill at a later date than scheduled. Similar to how businesses would sell to reliable companies with a stable financial position, I think it would be wise for credit card companies to review the consumer’s financial position as well, to ensure that the consumer has the ability to pay back the company and thus reducing the number of credit card defaults.

http://www.vancouversun.com/business/fp/credit+card+defaults+signal+consumer+stress/1996730/story.html