Credit crunch curtails cards
Wed, Oct 29, 2008
First came the mortgage crisis. Now comes the credit card crunch.
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 unprecedented losses. Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as borrowers defaulted on their payments.
With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion in the next 18 months, analysts say.
Currently, the total losses amount to 5.5 percent of credit card debt, and they could surpass the 7.9 percent that occurred after the technology bubble burst in 2001.
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 pulling in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain banks.
The creditworthy are no exception. American Express, which traditionally catered to upscale cardholders, said it would be increasing the effective interest rates by 2 or 3 percentage points for a broad range of its credit card holders – a move that could, for example, push a 15 percent rate up to 18 percent.
"We think it's prudent given the nature of those products and the economic environment we face," Daniel Henry, its chief financial officer, said on a recent conference call.
Cutting corners
Some reward programs have also gotten stingier as lenders cut corners to save money. Card companies, for example, have taken to substituting cheaper brands for Sony big-screen televisions to lower the cost of their redemption prizes.
For less creditworthy customers, issuers are pulling back on promotional no-interest offers as they try to get ahead of stiffer lending rules that have been proposed by federal banking regulators and Congress.
The regulations, while beneficial to consumers, will curb banks' profits on their riskiest customers. J.P. Morgan said that it was withdrawing some of its teaser-rate loans that were only marginally profitable.
Discover Financial shortened the duration of its zero-interest offers.
And lenders are slowing the flood of mail offers to a trickle.
Mail offers to new and existing customers are on pace to drop below 8.4 billion pieces, the lowest level since 2004, according to Mintel Comperemedia, a direct marketing research firm.
Online credit card applications have fallen for the first time in five quarters, in part because customers are receiving fewer mail offers that direct them to the Web, according to data from ComScore, an Internet marketing research firm.
Source : http://www.dallasnews.com/
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