Happy New Year? Maybe Not!

Major credit card issuers in the US are wondering if the losses they began to see in 2008 are just the tip of the iceberg. Charge-offs, those debts that the lenders have deemed "uncollectible" and debt settlements, those debts that lenders accept a reduced payoff for, are rising at a much faster rate than they have in the past few years. Discover Card Services is predicting that its charge-offs will nearly double in 2009.

Credit card issuers are taking a three-fold approach to the mushrooming credit card crisis. First, they're tightening lending restrictions. Fewer new cards are being issued, and creditors are demanding higher credit scores before issuing new accounts. This is not good news for consumers and small business owners who rely on credit cards to get through the month. Not all consumers are behind on their bills, and the move back to cash can be jolting even for those consumers who pay their bills on time. Small businesses that can't get new credit can't expand, and in some cases, can't even operate.

Second, card issuers are slashing credit limits and raising interest rates. Some consumers are seeing major cuts in the amount of their available credit. This has a dual effect. First, it changes the ratio between available credit and used credit, putting an otherwise good credit risk in a potentially negative credit situation. Second, the interest rates on existing purchases is going up, meaning that even consumers who are not using their available credit have even more debt to repay.

Third, card issuers are turning to the federal government in the hopes of being reclassified as "bank holding companies" in order to gain access to the recently authorized Troubled Asset Relief Program (TARP) funds. By asking the government to backstop the growing percentage of bad debt, the credit card issuers are hoping for some breathing room, compliments of Uncle Sam.

The upshot for the consumer in trouble is that credit card companies expect further losses in their consumer debt holdings. Debt settlement, a technique that more consumers are turning to, is expected to take center stage in 2009 as consumers look for alternatives to both bankruptcy and crushing debt loads. While creditors are warning consumers away from debt settlement, it continues to emerge as a potentially successful way for consumers to emerge from overwhelming debt without declaring personal bankruptcy.