Tuesday, October 28, 2008

Credit Card Crunch

The NY Times article, As Economy Slows, Lenders Begin to Curb Credit Cards brings the credit crisis from Wall Street to, you know, your street. If you want a pretty decent primer on how to protect yourself, check out the San Diego Union-Tribune piece here.

Either I have sucker written in halogen across my forehead, or my credit must be pretty good because the past few weeks I've seen an uptick in credit card offers stuffing my mailbox. That isn't exactly the norm right now, and the Times article lays out some basic ways that we'll start to feel the squeeze.

First, the why:

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.

After years of profiting off of us losing our shirts, lenders are now taking enormous losses. And make no mistake about it, even creditworthy consumers are going to feel the pinch, just like creditworthy mortgage seekers are having a hard time right now. If the financial and banking industry is broke enough to get bailout after bailout, then rest assured they're broke enough to extend any kind of credit to the likes of you and me. And that includes the plastic kind.

The how:

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.

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 even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.

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.

Some other notes from the article:

* Even Amex is pushing some creditor's interest rates up 2 to 3 percentage points.

* Rewards shmwards. That "free" flat screen went from a Sony to an Insignia.

* Anticipating the regulation that's headed their way, credit card companies are pulling back on zero percent credit card offers to everyone under the sun, eliminating teaser rates, and chopping up the length of time a zero percent rate is good for.

* Our mailbox will get 13 fewer pieces of junk mail a year. See above.

All of which may inspire a how-dare-they-! kind of response. Aside from the fact they scrod the pooch when they were making bank off of crazy credit limits, high fees, and trap doors for the average Joe and Jane, they now have some pretty legitimate reasons why they're doing this. The credit crisis is trickling down.

To summarize from the article:

* The credit card market is shrinking. It's not like people are exactly banging on the door to get even more credit cards and the debt that goes along with it.

* Credit card companies' profit margins are shrinking. Credit card companies have their own financing-- credit card bonds. Companies live and die on borrowing money, and the credit card companies are no exception. I touched upon this in an earlier post Why We Need the Bailout. So when investors stop investing in the tools that companies use to make money flow, like credit card bonds, companies lose flexibility to take risk (on the likes of you and me, for example, and our comfy interest rate).

* I don't know about you, but I curbed my spending like there's a bread line in my near future. That means less money for the credit card companies.

* Before, credit card companies could make up for a loss in profits by jacking up the fees. This isn't exactly the political climate to be attempting such shenanigans.

And that, folks, is why shite trickling down just never feels good when you're at the bottom.

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