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Current State of Credit Card Industry in America - Essay Example

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Summary
This essay critically observes the recent developments and identifies economic problems in the credit card industry in America. The banks and financial institutions now focuses on increasing their credit offerings to customers by the use of credit card as a measure of increasing their profit margin…
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Current State of Credit Card Industry in America

Download file to see previous pages... This essay offers a thorough analysis of the state of the credit card market in the United states. Since the early eighties, the credit card industry in America have been controlled by the banking and financial associations, namely VISA and Master Card International. Over the years, several merchants have entered the credit markets and have strategically focused on expanding their market share which led to the flooding of credit cards in the US market.
Looking at the rapid expansion of the credit card market; there are ominous signs for default in card payments which is the next most likely risk in the US economy after the mortgage crisis. This is due to the fact that the customers repayment capability of the credit card customers have declined after the economic crisis due to loss of jobs, fall of income, foreclosure of their homes, etc.
The credit card risk in USA has serious consequences for the credit companies, financial sector and the economy of US. The payment default of the customers would result in the loss of return on investments for the banks and credit card companies. The personal finance schemes would prove to be a failure and the credit card companies would loose huge amounts lent in the US market. This loss would affect the liquidity of the companies and the investors would loose confidence on the company’s performance. The market information on the declining performance of the companies would result in erosion of shareholder’s wealth and the share prices in the market would fall.
The overall decline in performance of the credit card industry would affect the market performance and the market index would plunge once more after the global financial crisis (Jickling 88). Proposed Solution The solutions to overcome the next most likely risk in the credit card markets of US have been proposed as follows. The increase in the credit card market risk is due to the intention of the market players to squeeze the borrowers to the fullest and restore their profit margins after receiving a setback from the losses of the mortgage market. The proposed solution includes intervention of the government to cut back the rising interest rates and the deceptive tactics employed by the credit card issues in charging the customers with more amount of repayment. Already the income level of the customers has lowered and a further rise in interest of the credit card companies would extract the entire liquidity from the economy and would raise the subsequent risk of credit card default. Thus government regulations on stabilization of the interest rates and reduction of the hidden costs would help to maintain a position of equilibrium in the credit card market. Secondly, the tightening of the eligibility criteria for credit cards is another solution proposed to avoid the future consequences. The credit cards in the US markets should be issued to worthy borrowers by estimating their income level and repayment capability. Customers like the students who have limitations in repaying the borrowed amounts should not be flooded with credit cards. These policies of the credit card companies are likely to resolve the situation of a likely future crisis in the credit card industry. Consequences of what happens if change is not made The future consequences are grave if changes in the credit card policies and the interest rates are implemented by the market players. The customers who have been facing a constraint in liquidity level would use the credit cards as their last resort. If the ever rising interests rates initially from 10% to 15% and then to 20% in the subsequent stages are not cut back, this will increase the ...Download file to see next pagesRead More
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