In the course of this recession, consumer attitudes towards spending have changed. So have banks’ attitudes towards lending.

In regards to consumer spending and credit cards, some consumers have had a voluntary attitude adjustment. Others have had an attitude adjustment thrust upon them. Several articles will show what I mean.

JPMorgan Chase Raises Minimum Payments

Please consider JPMorgan Raises Credit Card Monthly Minimum Payments.

JPMorgan Chase & Co., the biggest U.S. credit-card issuer, plans to raise the minimum payment on balances to 5 percent for some customers, less than a month before new federal curbs begin to take hold.

The increase from 2 percent takes effect in August, the company said in a notice customers received this month. Customers who pay less than the minimum may be charged extra fees, the bank’s Web site says. New York-based JPMorgan has about 159 million cards in circulation, a regulatory filing shows, and spokeswoman Stephanie Jacobson said the new minimum applies to fewer than 1 percent of customers.

By making some customers pay a 5 percent monthly minimum, Chase is minimizing its risk, said Bill Hardekopf, CEO of LowCards.com, a Birmingham, Alabama research firm. “Too many people got credit cards that should not have been approved for credit cards,” Hardekopf said today in an interview. “Chase is deeming those customers as high risk.”

Citigroup Raises Rates on 13-15 Millions Cards

Also note that Citi raises rates on millions of credit cards.

Citigroup Inc has increased interest rates on up to 15 million U.S. credit card accounts just months before curbs on such rises come into effect, the Financial Times reported citing people close to the situation.

“These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit,” Citigroup told the paper.

Clearly banks have had a voluntary attitude adjustment. They are tired of taking losses on credit cards and are acting to stem losses and raise rates while they still can. My guess is that default rates immediately go up in response to these measures by Citigroup and Chase. However, that is better for Citigroup and Chase than letting consumers run up debts only to default later.

Banks Cut Credit Lines, Consumers Gripe

Here is a more interesting article to consider: FICO Scores Show Flaws as U.S. Banks Cut Credit Lines.

When Sharii Rey, a paralegal in Portland, Oregon, had her credit limit reduced by JPMorgan Chase & Co. earlier this month, she said it would hurt her 760 credit score. That’s not the bank’s problem, she was told. It’s FICO’s.

After Rey’s $42,500 credit line was cut to $12,000, her debt relative to available funds almost quadrupled. This so-called utilization rate is a large component of the FICO formula and a higher ratio can lower a score. Rey, 62, is concerned a new FICO score will squash her ability to borrow.

Rey said she was counting on a credit “cushion” in case she was affected by the decline in the economy. She said she fears she won’t be able to buy a new home and car because her reduced FICO score will mean higher interest rates on the loans.

“I have been gritting my teeth so hard, I fear for the enamel,” Rey said.

Involuntary Attitude Adjustment

Rey has exactly the kind of attitude that banks should be fearing. Rey was ready and willing to use a $42,500 credit line should she be affected by the decline in the economy. The operative word in the last sentence is “was“. However, JPMorgan cut her off.

$12,000 should be plenty of cushion should one lose a job. If perchance it is not, then JPMorgan probably saved themselves a lot of money.

Someone 62 years old should be thinking about something other than buying cars or new houses on credit, namely saving for retirement. Anyone who claims “I have been gritting my teeth so hard, I fear for the enamel” is truly in need of an attitude adjustment.

Since she would not do it herself, JPMorgan is attempting to thrust an attitude adjustment upon Rey. And I might add, rightfully so, at least from the limited details as presented.

FICO Scoring Flaws

Let’s return to the article for a look at reported FICO flaws.

Congressman Luis Gutierrez, an Illinois Democrat, says the FICO formula, the most widely used by U.S. lenders, has flaws as banks decrease loans to consumers, regardless of individual risk profiles. At least 30 million Americans had their credit limits reduced arbitrarily during the second half of 2008, FICO estimates. In the first quarter, New York-based JPMorgan and Citigroup Inc. and Bank of America Corp. in Charlotte, North Carolina, slashed $320 billion from credit lines, according to a report by former Oppenheimer & Co. analyst Meredith Whitney.

“Reductions to a consumer’s line of credit based upon the lending institutions’ overall appetite for risk has little or no bearing on a consumer’s own risk of default,” said Gutierrez, chairman of the House Subcommittee on Financial Institutions and Consumer Credit.

Banks have scaled back lending during the deepest U.S. recession in five decades. The Federal Reserve’s quarterly survey of senior loan officers released May 4 showed about 65 percent of banks lowered credit limits on new or existing credit-card customers, compared with 45 percent in the January survey. Consumer credit, which includes credit card and auto loans, was $2.52 trillion in April, according to a Fed report released this month.

“The emphasis on utilization rates when you’re not running up debt and instead limits are running down makes FICO scores much less reliable,” said Josh Frank, a senior researcher at the Center for Responsible Lending in Durham, North Carolina.

“Is FICO an accurate predictor of risk?” said Evan Hendricks, publisher of “Privacy Times,” a Washington-based newsletter and author of “Credit Scores & Credit Reports.” “It’s the worst system around, except for all the rest,” said Hendricks, taking a line from former U.K. Prime Minister Winston Churchill.

FICO clearly is not perfect. One flaw I see in the system is people had too much credit and FICO did not penalize them enough for it. That FICO scores can rise as credit cards limits rise is certainly a mistake although it seems that FICO corrected some of that in the FICO 08 version.

Flaws or not, Gutierrez is making an assumption that these reductions in credit are arbitrary. It is clear that too much credit has been extended to too many people. Cutting back credit seems like a pretty smart thing to me given the state of the economy and jobs.

An easy case in point is a paralegal with a $42,500 credit line. We do not know what other assets she has, so perhaps that line is reasonable. However, her attitude as well as here dependence on credit suggests otherwise.

By the way, this curtailing of credit, voluntarily or in voluntarily is clearly a deflationary force.

Mike “Mish” Shedlock
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