Defaults on credit card debt continues to soar and it is about to get worse for the banks issuing the cards. A proposed change in a Federal Accounting Standard could jack up the default rate by a third requiring banks to increase their reserves which in turn would decrease the capital available to lend.

So what does that mean for the consumer?

If you are seriously behind on your credit card bill and you see no way to pay it on a timely basis, now is the time to negotiate a discounted cash settlement. You may be able to save thirty to forty percent of what you owe. It’s a good idea to use a non-profit credit counseling service to walk you through the process and develop a plan to pay for the settlement.

It is a common practice of banks to bundle credit card loans into an investment vehicle and then sell them on the market. When they do this, they don’t have to show those loans on their balance sheet as they are “off the books” deals. The change in the accounting standard will stop this practice and those loans will have to be shown on the bank’s books.

Banks are regulated and are required to keep a certain percentage of outstanding loans as a cash reserve for defaults. If the loans are “off the books” they are not included in the balance sheet and therefore the bank does not have to keep a reserve on them.

The accounting change will require that off the books loans be placed on the balance sheet and be subject to the requirements of any other loan. What this means is banks will need to greatly increase their cash reserves. To give an idea of how big an impact this will have; American Express says it will have to add $28 billion to its loan balance, Discover $20 billion and Citigroup, a bailout recipient, has to add $98 billion.

That huge influx of new loan liability will require that billions of dollars will have to be set aside as reserves. The fact that at least 10% of those loans are bad has motivated the banks to clean them up as fast as they can. If they can get $600 on a $1000 balance, that means they have just saved on the amount of reserve required for a $1000 loan. Banks are so motivated to reduce the number of delinquent debt that they are actually calling consumers themselves, not using collection agencies, and offering settlements.

There really is no downside for the consumer. By being late on the payments, the consumer’s credit rating is already damaged. If the cash can be put together the consumer can get a significant discount on their debt. However, the time to act is now. Late fees and a default interest rate of 30% are still being applied so why wait.

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