Credit Card Lenders Clamp Down Hard

Consumers are in a newly austere mood, and those who have lived beyond or at the edge of their means may be forced to retrench whether they want to or not. The New York Times reports that credit card issuers are cutting back on their lines of credit and special offers. Since debt-fueled consumer spending has been an economic mainstay, this again signals a deep and probably long contraction.

From the New York Times:

After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.

The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.

Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.

“If unemployment continues to increase, credit card net charge-offs could exceed historical norms,” Gary L. Crittenden, Citigroup’s chief financial officer, said…

Big lenders — like American Express, Bank of America, Citigroup and even the retailer Target — have begun tightening standards for applicants and are culling their portfolios of the riskiest customers. Capital One, another big issuer, for example, has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent in the second quarter from the previous period, according to regulatory filings…

While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action….ing consumers to check into the “Bad Credit Hotel,” an online game that teaches the basics of maintaining good credit.

Even those with good credit ratings are not excepted. American Express, which traditionally catered to more upscale cardholders, said it would be increasing effective interest rates by 2 or 3 percentage points for some of its credit card holders — a move that could, for example, push a 15 percent rate up to 18 percent…

For less creditworthy customers, issuers are pulling back on promotional offers that allowed borrowers to pay no interest for months as they try to get ahead of stiffer lending rules that have been proposed by federal banking regulators and Congress….

Online credit card applications have fallen for the first time in five quarters, in part because customers are receiving fewer mail offers that drive them to the Web, according to data from comScore, an Internet marketing research firm…

“Credit card issuers have realized their market is shrinking and that there is no room for extra credit cards, so they have to scale back,” said Lisa Hronek, a research analyst at Mintel. “People are completely maxed out with mortgages, home equity lines and credit card debt.”

At the same time, credit card profit margins have been narrowing, largely because lenders’ own financing costs remain elevated as investors spurn credit card bonds, just as they did mortgages. Another factor is that the interest rates banks charge even creditworthy borrowers have come down after the emergency actions taken by the Federal Reserve to ease the credit crisis.

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  1. Kien

    If this means I stop getting endless letters from Citibank asking me to take up a credit card, that’s one silver lining in the dark cloud. :)

    BTW, I saw a videocast of your (Yves) appearance on SBS Australia’s Insight. You were wonderful. Hope Insight invites you back in future discussions.

  2. Anonymous

    The McClatchy article on the same subject is also pretty good.

    One important point made in this article:

    Even so, credit card defaults probably won’t wreak as much havoc as mortgage defaults already have, because they’re on a much smaller scale.

    “This won’t be anything like the mortgage crisis,” said James Early, an analyst at The Motley Fool. “Simply put, the average person owes a lot more on her house than on her credit cards.”

    U.S. consumers have less than $1 trillion in outstanding credit-card loans, but more than $10 trillion in outstanding mortgage loans. And the delinquency rate for mortgages is higher than that for credit-cards: 6.41 percent in the second quarter, up from 5.12 percent the year before, according to the Mortgage Bankers Association.

  3. Yves Smith

    Anon of 2:36 AM,

    Thanks a lot for the McClatchy link. That is a very good news service, and I must admit I don’t read it as often as I should

    Fair point re smaller amount of debt in aggregate and therefore lower loss potential, but a couple of offsetting considerations:

    1. Now that banks are impaired, any additional losses hurt a lot, hence their aggressive curtailment of outstanding credit lines. It is bad enough to get pneumonia, but it is a far more serious ailment when you are trying to recover from a heart attack.

    2. This will kill retail spending, further weakening the economy, which will lead to layoffs…..the usual tightening of credit worsens a downturn story.

    3. Credit cards are a very important source of borrowing for small businesses.

  4. Anonymous

    Here's another data point for what it's worth. Bank of America has been pushing their 0% balance transfers pretty hard the last couple weeks. 3% upfront, 0% for 15 billing cycles. They can deposit it straight to a checking account, so it doesn't need to pay off other cards.

    It's a general offer, not a targeted one.

    It was the offer on the hold music when I called in and it's the main offer when I log in to check my statement.

    The gotcha is that if you miss a payment, the default interest rate is 29% (!!). The other gotcha is that lower interest debt gets paid off first, so if I wanted to use that card again for purchases, those charges would be 'trapped' behind the cash advance at a much higher interest rate.

    Still, 3% money is 3% money. It doesn't hurt to have it around. The customer service agent was encouraging me to take up to my credit limit even though I wanted less.

    It may just be that they're calculating that the default rates, purchases and 3% up front is worth it to get people to take the money, but personal experience doesn't square up with the nyt article. Take it as another data point.

    Check out offers on the link.

  5. fresno dan

    I don’t know if I mentioned it here, but about 2 weeks ago I did my annual visit to the Washington DC (Smithsonian National) Zoo, and their were people outside of the Metro (subway) trying to sign people up for credit cards. I had no interest in that, but now I wish I had found out the company doing this.
    BTW, I also get endless solicitations from credit card companies and my Mortgage holder (Wells Fargo) sends me letters practically begging me to take out a HELOC


    What came first.. the chicken or the egg.. the loan or the borrower? If loans were ripe low hanging fruit loaded on the banks “trees”, but only the credit worthy may pick, they will rot on the limb. Those people were gone years ago. We are a subprime country with subprime corporations and companies built on phony books and balance sheets.. Think about it..

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