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Thread: another effect of the CitiGroup Bailout ...

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    Banned Melonie's Avatar
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    Default another effect of the CitiGroup Bailout ...

    ... several 'anecdotal' sources have reported receiving notices that CitiGroup is unilaterally changing the terms of their lender agreements. Specifically, CitiGroup is re-instituting the practice of 'universal default' ... where a delinquency occurring in regard to ANY account will be used to trigger the imposition of very high 'default' interest rates on other accounts which are not in default. With CitiGroup now comprising about 1/3rd of all US consumer lending, and with that percentage likely to rise in the future as smaller competitors are not similarly bailed out, it would appear that if US consumers want credit in the future they will be forced to take it under such terms.

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    Senior Member Butrcup98's Avatar
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    Default Re: another effect of the CitiGroup Bailout ...

    That's why I try to only apply for credit with a fixed interest rate or with 0 interest for a certain number of months.

    Other than that I either pay my cc off every month, so that I don't accrue interest, or I pay cash.

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    Default Re: another effect of the CitiGroup Bailout ...

    More and more I am paying cash.

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    Banned Melonie's Avatar
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    Default Re: another effect of the CitiGroup Bailout ...

    That's why I try to only apply for credit with a fixed interest rate or with 0 interest for a certain number of months.
    Perhaps you miss the significance. If for example your 0% interest for 6 months 8% fixed interest rate credit card account is with citibank, should you wind up being late making say a car loan payment to a different bank your CitiBank 0% intro 8% fixed interest rate credit card account could immediately rocket to a 24% penalty interest rate !!! If you're unhappy about that you're certainly welcome to pay off the entire balance immediately and seek a new credit card account somewhere else.

    UNIVERSAL default essentially covers any account that is reported by the credit agencies.

    While some people will always be in a position of being able to pay every single one of their bills on time, or at least having sufficient cash assets to immediately pay off a credit card balance when a super-high penalty interest rate is triggered, there are a whole bunch of people out there who can't. Imagine hypothetical Joe Sixpack who has been reasonably careful about his borrowing and spending, but who has run up a $10k balance on a credit card and can perhaps afford to pay $500 a month against it (with $100 of that $500 being interest at a 10% rate). But with slow business conditions, Joe has his weekly working hours cut with corresponding drop in paycheck. Joe also has Christmas shopping coming up, so he winds up being late on his monthly car payment (to a different bank) but makes on-time payments on his credit card and other monthly bills.

    The credit card company spots the late car payment on Joe's credit report and jacks his credit card interest rate from 10% to 25% based on universal default ... meaning that Joe's $500 a month credit card payment now gets split $250 for interest and only $250 against the balance. At that rate it will take Joe 4 years worth of $500 monthly payments to get out from under his credit card if he stops adding new charges immediately (as opposed to less than 2 years under the original non-penalty interest rate).

    Joe also has essentially zero chance of being approved for a new credit card, personal loan etc. with a 'reasonable' interest rate given the defaults appearing on his credit report. Joe also doesn't have $10,000 in non-retirement account related savings or investments that can be liquidated to immediately pay off the existing credit card balance. This is a 'debt trap', pure and simple.

    ~
    Last edited by Melonie; 11-27-2008 at 04:51 AM.

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    Senior Member Butrcup98's Avatar
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    Default Re: another effect of the CitiGroup Bailout ...

    I guess I didn't understand the full meaning. So basically, if I'm late on ANY bill, whether or not it is a credit card, the cc can raise my rate to the default. That doesn't seem right.

    I actually just received their disclosure of the change in terms and it didn't register what UNIVERSAL meant. Again, that doesn't seem right.

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    Banned Melonie's Avatar
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    Default Re: another effect of the CitiGroup Bailout ...

    ^^^ it may not 'seem' right, but it IS legal ! The technical basis used is that falling behind on any bill represents an 'elevated credit risk' situation for all lenders to which the person owes money, which then justifies the charging of higher interest rates in order to allow the financial institution to 'hedge' future default losses. Like yourself, there will undoubtedly be many many Americans who don't register the implications until they wind up being late paying a different bill and find out first-hand what universal default entails.

    Ironically, for 'rich' people, this development is actually a benefit. Universal default penalty interest rates allow the financial institutions to collect additional money from 'subprime' borrowers which can then be used to offset losses on belly-up 'subprime accounts. Before universal default, 'rich' people were charged a marginally higher interest rate on their 'prime' credit card and other loans which was used to offset losses on 'belly-up' subprime accounts. Arguably, with universal default in place, the interest rates charged on 'prime' accounts will drop marginally, while the interest rates on 'subprime' accounts will rise significantly ... effectively allocating the costs of making 'risky' loans ( which includes bankruptcy losses / cram-downs / negotiations) among the 'risky' borrowers. In essence this compares to some drivers with excellent records receiving a 'safe driver' discount which greatly lowers their car insurance premium, while other drivers with poor records being charged very high 'assigned risk' car insurance premiums.

    However, this will also undoubtedly result in 'guilt by association' decisions, with an example being all male drivers under 25 being automatically thrown into the 'assigned risk' category. Lenders are highly likely to use a would-be borrower's credit rating, job history, tax return verified past income etc. as criteria for categorizing future borrowers as 'risky' or 'subprime', and charge them elevated interest rates, even though their is no individual proof that the person represents a significantly elevated risk of future default.
    Last edited by Melonie; 11-30-2008 at 04:48 AM.

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    Default Re: another effect of the CitiGroup Bailout ...

    Best part about this kind of greed from these thieves is that it will almost guarantee massive defaults resulting in NO payments being made to them. At some point those in debt are bound to give up and say the hell with it.

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    Default Re: another effect of the CitiGroup Bailout ...

    ^^^ or they will turn to the gov't for a 'credit card' bailout plan to go along with the 'subprime' homeowner bailout plan !!! Or it will simply mean more bankruptcies for 'subprime' credit card account holders, followed by a repeat gov't bailout of CitiBank.

    However, one thing is for certain. In the future, unless you have a high verifiable income (I'm thinking $60k+ per year) and an excellent credit rating (I'm thinking 720+ ) odds are that A. you will simply be denied new consumer loans / credit card accounts, or B. the 'subprime' interest rates offered will be shockingly high.

    On a side note, this also logically indicates that a certain type of business is likely to do very will in the near future. If 'subprime' would-be borrowers are cash strapped due to penalty interest rates on existing account balances, and if their TV / refrigerator etc. needs to be replaced, with zero credit available the only option left open to them will be 'rent to own'. Thus companies like Rent-A-Center, Aaron's etc. should pick up a lot of rental customers who were formerly buyers at Sears, Lowes etc. This basically follows the same trend of poor credit risk 'subprime' homeowners now being renters.

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    Senior Member Butrcup98's Avatar
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    Default Re: another effect of the CitiGroup Bailout ...

    Makes me glad that I've watched my credit like a hawk.

    My husband and I don't buy many things on credit. House, car...yes. But anything that costs less than a few grand is always cash for us.

    I know that many people are not able to afford that. But I'm thinking that more people should try living within their means. Just because your neighbor has it, doesn't mean the you need it.

    What bothers me about credit, or should I say how people use it, is that people would rather finance something for a year or two and pay a lot of interest, than save the money for that amount of time, pay cash, and save themselves between 8 and 30%.

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