New Credit Crisis
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New Credit Crisis


Updated: December 26, 2012

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New Credit Crisis
September
11

Remember the first time you applied for credit card? What were you thinking about? Most probably, and it is natural, your mind was occupied primarily with things you could purchase with your credit card. It's very unlikely that you tried to work out plans on killing your future credit card debt.  Rather such a thing never came to your mind while in the application process.

But statistics shows that lots of credit cardholders end up in debt, and when they do - various sophisticated ways of getting out of it are emerging in their heads. Until recently one of the effective ways of clearing off the debt was one's mortgage loan.

Up to this day, it has been rather easy to be approved for a home mortgage due to the fact that a home never loses its value. Consequently, the amount you owe on your mortgage loan is estimated as a good debt and the lending company doesn't mind keeping you repaying that.

However, the easy-to-get home mortgage has stayed in the past as lots of homeowners have defaulted on their loans. The lenders found it hard to continue raising funds and it motivated them to double the interest rates which made it much harder for some customers to qualify for the loan.

The inability to possess your own home appears to be only half the trouble, considering the tight connection between the mortgage debt and credit cards. It has been a long practice among credit cardholders to use the money from their mortgage loan for the purpose of covering their credit card debt.

Why make new credit card applications for balance transfers for example, when you can reduce the debt with the home equity? And isn't it a strikingly wise approach?

It would be, but for one significant "BUT". Paying off the debt on one of your high limit rewards credit cards with the mortgage loan money you very often default and end up with a balance on the home equity. It turns out that in your attempt to stop the practice of making only the minimum monthly credit card payments or stop skipping them, you inevitably arrive at a new debt - the one on your house.

It is understandable, under the circumstances, that the lenders try to protect themselves from loses and limit the number of applicants eligible. This practice, however, creates a situation where lots of card holders find it impossible to repay the cost of their plastic. A new credit crisis is on the horizon.

The close ties between credit card companies  and mortgage lenders are easily explained.

Long ago, in the after-war years, home equity was offered as an effective tool to pay off high interest rate credit cards, which were a rule then.

Lots of customers rushed off to take advantage of such a deal but their undying irresponsibility and incorrigibly bad spending habits led them to new debts, leaving with a notable balance on the home equity at the same time.

So, practice has shown that it makes more trouble than use allowing credit card debtors to carry out their obligations with their home mortgage money. Credit card holders are now left to look for other ways of killing off debts such as credit counseling, debt consolidation loan and others.  They are facing the necessity of being more responsible and discipline, that is using their credit cards only for durable things and no way for groceries, fast foods or gas.

Yes, mounting credit card debt may come to a crisis without a home mortgage but at least you won't have to struggle with two debts at the end.

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