Arianna Huffington offers the definitive version of a potential credit card debt tsunami:

It’s a particularly vicious economic circle: every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials like food, housing, and medical care — the costs of which continue to escalate. But as their debt rises, they find it harder to keep up with their payments. When they don’t, banks, trying to offset losses in other areas, then turn around and hike interest rates and impose all manner of fees and penalties… all of which makes it even less likely consumers will be able to pay off their mounting debts.

I filed for chapter 7 in early September, right before Lehman Brothers crashed and burned and the economic meltdown began.  One of my creditors had lowered my limit, but none of them hiked my interest rates until I defaulted on my payments in the lead up to my BK filing.  Once I filed, I was under the protection of the United States Bankruptcy Court and out of my creditors’ range. 

I didn’t dodge a bullet.  I dodged a strafing.

Other creditors haven’t.  Delbert, in a bobisbankrupt comment, nails it:

I thought I could hang on a while longer, paying on 5 credit cards, hoping for some good moneymaking months coming up. I couldn’t sleep or concentrate.  I began getting panic attacks.

I inadvertently clocked in late with a credit card payment or two and wham, sorry, 28% interest.  ”No, we can’t lower your APR.”  That definitely was the defining moment.

Had the credit card companies worked with me, lowered my interest to say even 10%, I would not need to file for bankruptcy.  I would be able to pay on the principal.  I can’t do that with 28% gangster rates.

More and more credit card holders are getting hit with Shylockian gangster interest rates and other card issuer spankings.  From On The Money’s John Ulzheimer:

On February 27, released the results of a survey designed to identify the percentage of credit card users who had suffered some sort of adverse treatment from their credit card issuer. 33.7% of those surveyed said at least one of their credit card companies had done at least one, and sometimes more, of the following less-than-friendly actions to their credit card accounts:

• Increased their interest rate

• Increased their minimum payment requirement

• Changed their payment due date

• Lowered their credit limit

• Reduced their rewards program benefits or

• Closed their accounts

In many of the cases the action taken by the credit card company had nothing to do with negative performance by the cardholder.

Arianna lays out the next meltdown scenario. Usurious interest rates will push more credit card holders into default.  Banks and investors who bought securities backed by credit card debt (a $365 billion market) will be hit with losses.  To cover those losses, banks will raise the interest rates on their remaining cardholders, which will lead to more defaults and more losses for the banks.  The whirlpool will circle, faster.

Why would banks spin a vicious cycle of debt and default that makes them lose money?

Because they believe the Feds will bail them out when they hit bottom.

So why not rake it in on the way down?