Business Case Studies, Economic Crises Case Study, US Financial Crisis, Is Credit Card Debacle in the Making?

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Case Title:

US Financial Crisis: Is Credit Card Debacle in the Making?

Publication Year : 2008

Authors: Hepsi Swarna & Saradhi Kumar Gonela

Industry: Banking, Insurance and Financial Services

Region:US

Case Code: ECC0026

Teaching Note: Available

Structured Assignment: Available

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Abstract:
Is credit card debacle in the making? No one knows, really. Credit Cards, innovated in the mid-20th century, cultivated the culture of ‘spend now, pay later’ among the US consumers, which was later welcomed and adopted through out the world. Credit card usage increased very rapidly over the years, due to the attractive offers given by the credit card companies (led mostly by banks). Consumer spending is very vital for an economy to grow and the US consumers supported their economy by living beyond their means with the help of credit cards. Over the years the credit card industry largely left unregulated, drove the consumers to borrow excessively resulting in alarming levels of credit card debt. After the financial crisis in 2008, suddenly the credit card debt became unmanageable. Credit card companies are facing huge credit card losses, due to rising credit card defaults. To cover their losses credit card companies have raised the interest rates and to limit the exposure the companies lowered the credit limits. In the wake of massive unemployment due to the financial crisis, consumer confidence touched its ever lowest levels and credit crunch has made it difficult for consumers to carry on with their day to day activities. It is being predicted that the next crisis would be the credit card crisis, if the default rates are not contained in time.

Pedagogical Objectives:

  • To understand the US consumer spending habits and the role of credit cards in boosting consumer spending
  • To debate on the role and usage of credit cards as demand inducing instruments
  • To examine the possible repercussions due to the increasing credit card defaults in the US economy.

Keywords : Financial Crisis, Subprime Mortgage, Credit Cards, Credit Bubble, Housing Market, Bank Of America, American Express, Default, Overdraft, Consumer Spending, Revolving Credit, Consumer Spending

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