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
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Credit card companies usually check your credit rating extensively before granting you an account. Even so, that does not guarantee that the client will always pay his/her bills, as accidents and financial crisis do happen quite often. Credit card companies are willing to take the risk of defaults in order to get as many customers as possible. On another note, I've read that young adults, between the ages of 18 and 25, have the most credit card defaults because they keep paying the minimum payment each month and then end up trapped in the vicious cycle of compounded interests, ultimately resulting in declaring bankruptcy.
ReplyDeleteWhen different banks issue their credit card, they have already reviewed the credit history of the credit card applicants. The credit concept that is introduced in the accounting system allows different corporation maximize their cash flow and their flexibility. It is set up for the interest of both trading companies. However, on the other hand, credit card company doesn't lend money to their creditors for business conveniences. Credit card company tend to make great amount of profit by receiving high interest rate as 19.5%. Also, they introduce the minimum payment system so that their creditor will pay off their debts slower. The slower the money that is returned to them, the greater period of time that interest is getting compouneded and increased. It is a good idea to use credits in business areas,but it is never wise to sustain your personal life on credit cards.
ReplyDeleteI agree with Sherry. However, there are banks out there that allow user to get access to credit cards even though they do not have any credit rating. They say "we will grant you the card without any credit rating because we know we can trust you on building one." This is just an excuse that they make for themselves to make more money and tricking people to use credit cards. On the other hand, credit cards are necessary for the economy, it drives it up! The economy is closely tied together by buyers and users. Take Vancouver for example, the 2010 Olympics is coming soon next year, and we need people to use their credit cards (from all parts of the world) to make money and excite our economy. I agree with Sherry. However, there are banks out there that allow user to get access to credit cards even though they do not have any credit rating. They say "we will grant you the card without any credit rating because we know we can trust you on building one." This is just an excuse that they make for themselves to make more money and tricking people to use credit cards. On the other hand, credit cards are necessary for the economy, it drives it up! The economy is closely tied together by buyers and users. Take Vancouver for example, the 2010 Olympics is coming soon next year, and we need people to use their credit cards (from all parts of the world) to make money and excite our economy.
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