Wall Street Worries – What They Mean For Your Credit Cards

Bear Stearns… Fannie Mae… Freddie Mac… AIG… Washington Mutual… and the list goes on.  With this unprecedented turmoil in the financial markets, little attention is given to what impact this has on credit cards.  Fortunately, credit cards are one of, if not the only, player in the financial sector that will emerge relatively unscathed from this meltdown. Here’s why:

Visa and MasterCard generate earnings from transaction fees – a small percentage of your purchase that merchants pay to accept their cards for payment.  Visa and MasterCard do not loan any money, they merely process the transactions. In fact, both of these companies are comfortably profitable without any debt. The only negative they have experienced were antitrust settlements in which they had to pay American Express several billion each. Other than that, these companies are safe as can be. In fact, they may be the safest companies out there because they “win” and get their fees whether the credit card issuer (who loans the money) wins or loses. American Express and Discover have allocated additional capital to cover future losses from an expected rise in defaults on credit card payments.

Between the shuffling on Wall Street, the mergers and acquisitions taking place, you will see changes in ownership of some financial institutions – mainly banking. Bank of America acquired Merrill Lynch, and therefore their credit cards too. Washington Mutual will most likely be bought out too. Although the companies of the bank-issued credit cards may change, the terms on these cards is expected to remain relatively unchanged for quite some time until after the dust settles. Again, you will mainly see this with bank-issued credit cards. For the credit cards issued solely by credit card companies, such as American Express, Discover, Capital One, and others – there’s no more reason now than any other time as these companies merging or being bought out by other companies. In fact, it is less likely they will be bought out as in the past since commercial funding is harder to come by.

The one change you may experience is tighter credit limits. This simply means that the generous credit limits of 10x or 100x your monthly spending may not always be available. For the large majority of Americans, this will have no impact since they never utilize close to their full credit lines anyway.

If you carry a balance, rates may fluctuate depending on your issuer. They are more likely to change if your credit card is issued by a bank for the reasons stated above. In addition, these banks which are experience losses in their other divisions may turn to their profitable credit card divisions in an attempt to make up the slack.  This is not set in stone, but rather an opinion that is predicted by some experts. If this were to happen, they may increase rates. If this is done, you should transfer your balance to any of the number of other credit cards out there.

 
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Tim Ramsey