Who really pays the piper? : Rooftop Views

Rooftop Views

Who really pays the piper?

Over the past several months a steady stream of large financial companies have given notice of large losses that they are sustaining as a result of the credit crunch and sub-prime mortgage market issues. So the question is, who really loses when a company or in this case an industry loses a lot of money?

Clearly, it is rarely the CEO of the firm. And obviously, it is initially the shareholders in the company, as the value of their investments plummet. But who really pays the price in the end...and how? Well, as many Americans are finding, the buck stops with the consumer.

Home Loan Rates

Although home loan rates overall remain fairly low, Fannie Mae and Freddie Mac--the two large government sponsored companies that form the framework for most conventional home loans--have announced a series of changes over the past sixty days. Many of these changes deal with stricter underwriting standards and guidelines, but several are price increases as they work to cover losses incurred based on previous loans.

Price increases are generally not paid in cash, but rather are reflected by a higher interest rate on a new loan - which is why it is crucial that you clearly understand the rates and terms that you qualify for, when you are shopping for a new mortgage.

Credit Cards

It's pretty common practice for credit card issuers to hike rates if a payment is missed or the card is charged over the limit, especially if that consumer had an average or below average credit rating. But it is becoming increasingly common that issuers are starting to place these 'hair trigger' rate resets on consumers with solid credit ratings. The reason? You guessed it, most of the credit card issuers are the same large financial companies that are being hurt by the overall strife in the financial markets.

Many of these companies fear that the financial issues related to the mortgage industry will spill over into the revolving credit card markets, as it only stands to reason that a consumer, if faced with either paying their mortgage or their credit cards, will probably choose their mortgage. So as foreclosures rise, credit card late payments and losses will ramp up accordingly.

How to Protect Yourself

The best defense you can take is to proactively monitor and safeguard your credit. Additionally, when it comes to your credit cards in particular, make sure that you do not give that lender reason to bump your rates. If they do, call their customer service lines to ask them to reverse course, or risk losing your business. If your credit score is strong, you will greatly increase your chances of winning this fight, or being able to simply follow through on your threat and take your business elsewhere. This will at least help mitigate the chances that YOU will have to help subsidize the massive losses being experienced by some of the largest banks in the US.

New Year's Resolution Idea

Check all of your credit cards that you carry balances on to confirm the current rate. You may be surprised to see that some of these rates are higher than you recall. Remember that credit card rates can be changed very frequently and easily by the issuer, and rarely in your favor.

11:26 AM - Feb. 6, 2008 - comments {1} - post comment

RE: Who really pays the piper?
Great advice. As an x financial advisor I was always amazed at how little knowledge people have of the various things like credit card rates, that effect their living expenses and can negatively effect their credit rating and their financial well being.
Nightwatch - 9:17 AM - Feb. 8, 2008