Credit Card Debt Management

The credit card is a thing of prestige in some circles. Take, for instance, the recent American Express commercial poking fun at the businessman’s comic book character-themed credit card in lieu of the prestigious AmEx Gold card. In fact, in the commercial it causes the poor, dim-witted businessman to lose out on an apparently lucrative business deal.

Yes, credit card colors and styles draw respect in some circles. Another point of pride, albeit one much less talked about, is the credit limit. Credit card companies can raise your credit limit at will, just as they do with your interest rate. Card issuers increases generally consider credit limit increases two or three times a year. When the bank sees you handling your repayment plan responsibly (i.e. no late payments or over-the-limit charges), they will likely offer you an increased credit limit. If you get an offer for an increase in your limit, you do have the option to decline it, unlike an interest rate increase (too bad we can’t decline those)! You may want to decline it if you are having trouble paying off the balance you already have, but we’ll get to that.

A credit limit increase is often viewed as a good thing by the cardholder. All too often, it’s also viewed as a signal to spend more, spend more. There are two problems with this. It gets the consumer mired deeper and deeper in debt. It’s a psychological issue, and a huge temptation for cardholders who haven’t learned how to get their spending under control. Just because you have room on the card doesn’t mean you can afford the payment. If you can’t afford it now with cash, you won’t be able to afford it a month from now. It may sound like your grandmother talking, but she knew what she was talking about.

Furthermore, credit card companies can decrease spending limits just as fast as they increase. This can have consumers over a barrel with interest charges and over-the-limit fees. It can ding their credit report in a major way and cause their interest rate to skyrocket. It ain’t pretty, and don’t think it won’t happen to you. Bottom line, is a credit limit a good thing? It’s all relative. But if you have a history of credit troubles, it’s best to decline the offer. It may be handy in an emergency, but the chances are good that you would have already nearly maxed out your available funds and they wouldn’t even be available anyway.

The first two quarters of 2008 have been a real mixed bag for American Express. On the bright side, the company saw two rulings in its favor in legal claims that MasterCard and Visa were intentionally blocking banks from partnering with competitor AmEx. The $4 billion in settlement payments from those antitrust suits could not have come at a better time.

According to Bloomberg.com, American Express stock has dropped nearly 20 percent, historic losses within a six-month period for the company. The losses are being blamed largely on the current economic slowdown affecting consumer spending and the business climate.

What’s interesting is that even AmEx’s top clients (and the ones who the company most aggressively recruits), the big spenders with high credit scores, are having issues. According to CEO Kenneth Chenault:

“We are seeing very affluent people who have had historically very, very strong spending history with us cutting back.”

Late and uncollectible loans were higher than expected in the second quarter, according to Chenault. The company’s long-term forecasts are being put on hold until the economy improves, and tracking has halted for the company’s $4 to $6 earnings per share forecast for 2008.

The news is further proof that AmEx, Discover, and Capital One are shaky investments for shaky times. Visa and MasterCard, however, have no exposure to bad loans because they are not lenders. Though Visa and MasterCard may be more stable, many investors (very likely including Warren Buffet, who owns 13 percent of AmEx stock) might be inclined to advise the purchase of AmEx, Discover and CapOne stock while the getting’s good. America’s obsession with credit cards isn’t going away any time soon, so the companies are sure to rebound.

RapidAdvance and Humboldt Merchant Services have teamed up to revolutionize small business loans. Not sure of the interest rates on this option, but at least it’s interesting and gives small business owners more options.

RapidAdvance provides cash advances to businesses throughout the U.S., U.K. and Canada. Humboldt, meanwhile, is one of North America’s leading payment processors. Small- to mid-sized business owners will now have the option to get a loan, or “cash advance,” for business purposes. It might be to expand the business, purchase new equipment or inventory, etc.

Repayment of the cash advance would occur gradually, as a small portion of each transaction where the business owner is processing a customer’s credit card. These so-called merchant cash advances are unsecured loans with no business use restrictions, and have a high approval rating of about 80 percent, according to a press release.

It’s a good idea, supposing the fine print of the agreement would not defeat the purpose. One can’t help but wonder about that wonderful print everybody loves, the fees, the interest charges, the terms and conditions. One thing this venture does have going for it is that it joins together two reputable, well-established companies with proven track records of long-term stability and success. It’s not like it’s an uncertain new business venture.

However, with merchants already complaining about the merchants fees imposed by the credit card companies with each credit card transaction processed, one has to wonder whether business owners will really go for this. Will they be willing to have a loan repayment automatically deducted from their already slimming profits? It might be a tough sell indeed.