Credit Losses
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Credit Losses

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Credit Losses
January
25

As anticipated, the credit card crisis has led to the worsened situation in the US economy and the growing distrust to it on the part of European markets. It has caused the Federal Reserve System and the government to think of some radical measures to bring relief and get back on track.

As far as the Federal Reserve is concerned, it has announced the reduction of the fed funds rate to make credit a bit cheaper and to allow debtors settle their debts. The fed fund rate and prime rate reduction will be the most favorable time for customers to pay off their huge balances accumulated in an attempt to do away with a mortgage burden.

So, banks are reducing their prime rate, the interest rate at which they issue credit to their customers, giving them a new hope. Helping credit consumers achieve a healthy personal economical ground, banks and credit companies contribute to the US economy recovery. However, Citigroup, one of the largest issuers in the USA, has a different policy.

So, while such companies as American Express and Discover are lowering their interest rates to make things easier for the public and enterprises, Citigroup is going to compensate for the enormous losses it has incurred because of giving easy credit to customers with weak credit.

Being forced to make an $18.1 billion write-down recently, Citigroup is now intending to avoid a possible risk in the future through raising rates and reducing credit limits.

So, who suffers most from this tough measure? The rates rise will most likely be implemented in the states that accounted for most part of the Citigroup's credit card losses. They are Florida, California, Arizona and some more.

Now, if you want to apply for a Citibank credit card, be it a business credit card or one for students, you will face harder requirements to qualify and you will probably be eligible for a smaller credit line. However, this applies mostly to customers who are a bad credit risk in the eyes of the lender and who may start defaulting on their credit cards.

Good credit customers with a long payment history and no missed or delayed payment records in the credit report may count on the preservation of the existing rates or their reduction.

The multibillion write-off done by the Citigroup is not the only reason to tighten the amount of credit issued and toughen the application requirements. Because of the gross losses, Citigroup's shares have also fallen, incurring a 7.3 % loss and making the price less that half of what it was a year ago,

So, the company is losing its funds, together with its share buyers' trust. In order to raise finds, Citigroup plans to sell its convertible preferred stock, using the revenues to finance the public and investors. But if the stock is sold at a low price, it won't do any goof to the shareholders actually.

The other issue that worries share buyers is the reduction of Citi's dividend by 41%. Any stock buyer has an income level higher than 32% a quarter offered by the company. What's more it may be a sign of capital losses and maybe the elimination of the dividend at all like it happened in the early 1990s.

So, Citigroup has had enough of trouble recently and the credit crisis aggravates things. However, creditworthy customers should not be frustrated about the bad developments in the company. They will always have the best terms, conditions and rewards being a stable source of revenues for their creditor.

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