Credit card chargeoffs are soaring. In response American Express, Chase Cut Card Limits, Lowering Credit Scores.
About 45 percent of U.S. banks reduced credit limits for new or existing credit-card customers in the fourth quarter of 2008, according to a Federal Reserve January survey of senior loan officers. Financial institutions may slash $2 trillion in credit-card lines in the next 18 months, Meredith Whitney, a former Oppenheimer & Co. analyst, wrote in a Nov. 30 report.
“Don’t cancel the card to spite the card company because you’ll just hurt your own credit,” said Emily Peters, San Francisco-based personal finance expert at consumer Web Site credit.com.
Cardholders will damage their credit history if they cancel an older account and lose the available credit on that card, she said.
Chase increased the minimum payment to 5 percent from 2 percent for certain borrowers with large balances, Capital One Financial Corp. increased the rates for new customers on fifteen cards and Citigroup and Bank of America Corp. began charging a 3 percent fee for all transactions made outside the U.S. in U.S. dollars, according to Bill Hardekopf, chief executive officer of LowCards.com, a Web site that compares the rates of almost 1,100 credit cards.
American Express’ charge-off rates of loans rose to 8.29 percent in January from 7.23 percent a month earlier, a 15 percent increase, based on Bloomberg data. Chase’s charge-off rates increased to 5.94 percent from 5.32 percent, a 12 percent jump.
Cardholders most likely to see credit limits slashed have large balances, delinquent payments or recent dips in credit scores, said Arnold of CardRatings.com.
Consumer Lending Standards Tighten Further
According to the Senior Loan Officer Opinion Survey on Bank Lending Practices consumer lending standards continue to tighten.
Large fractions of domestic banks continued to report a tightening of policies on both credit card and other consumer loans over the past three months. Nearly 60 percent of respondents indicated that they had tightened lending standards on credit card and other consumer loans, about the same fractions as in the October survey. Close to 55 percent of respondents reported having reduced the extent to which both credit card accounts and other consumer loans were granted to customers who did not meet credit-scoring thresholds. Roughly 45 percent of the respondents also reported having raised minimum required credit scores on credit card accounts and other consumer loans, a proportion slightly lower than posted in the October survey. About 45 percent of banks reported having lowered credit limits for either new or existing credit card customers, down from the 60 percent that reported doing so in the October survey.
On net, about 15 percent of domestic banks indicated that they had become either somewhat or much less willing to make consumer installment loans over the past three months, a notable change from the roughly 45 percent that so indicated in the October survey. About 45 percent of respondents, on net, reported that they had experienced weaker demand for consumer loans of all types, similar to the fraction in the October survey.
Blessing In Disguise
Consumers are complaining that their minimum payments are going up. Instead they should consider it a blessing. Anyone carrying a balance month to month is doing something wrong, most likely living beyond their means and/or not having a cash cushion to fall back on in case of emergencies.
Utilization Rate Factor
This advice to not cancel cards is interesting. By implication one can increase his credit score simply by getting another card. I don’t buy that line of thinking, but here is an example from the first article.
The credit limits on Brown’s cards have been lowered, which has raised his debt relative to his available credit. This so-called utilization rate is a key factor in determining credit scores. Brown, a 58-year-old construction company owner in San Diego, has seen his credit score drop to 650 from 760 over the past 13 months.
“Interest rates on all of my cards are going up now and my minimum payments are almost doubling because it looks like I’ve maxed out my cards,” said Brown, who uses credit cards to fund his home-building company. “It’s a Catch-22.”
I think the key factor in Brown’s case is the fact that he is using credit cards to fund his home-building company. Funding a home building construction company with credit cards is a damn risky thing for lenders in this environment. I don’t blame the lenders one bit for being nervous.
Mortgage Equity Withdrawal (MEW) went first, Home Equity Lines Of Credit (HELOCs) went next, now credit card lines are being cut every month. In this environment there is little hope for those with no cash cushion who lose their jobs and credit lines.
Mike “Mish” Shedlock
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