FINANCIAL CRISIS: Credit Card Crunch
Consumers Feel the Next Crisis: It’s Credit Cards
New York Times, October 29, 2008
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.
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.
Big lenders like American Express, Bank of America, Citigroup and Target have begun tightening standards for applicants and are culling their portfolios of the riskiest customers.
Capital One has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent.
Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries.
In some cases, lenders are reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.
The result [for consumers] 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…lenders have 30 days to notify their customers, and they often wait to do so after taking action.
American Express 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.
Some reward programs have also gotten stingier as card companies have substituted cheaper brands to lower the costs of their redemption prizes.
“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.
Meanwhile, bank executives say consumers are starting to curb their spending, to an extent that may become clearer Wednesday when Visa reports its third-quarter results.
In previous downturns, banks could make up the missing profits by raising fees. This time, there may be less room to maneuver.
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