Consumers Feel the Next Crisis: It’s Credit Cards - Fewer offers- More cuts

New York Times
October 29, 2008
Consumers Feel the Next Crisis: It’s Credit Cards By ERIC DASH
First came the mortgage crisis. Now comes the credit card crisis.

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 heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.

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.

“If unemployment continues to increase, credit card net charge-offs could exceed historical norms,” Gary L. Crittenden, Citigroup’s chief financial officer, said.

Faced with sobering conditions, companies that issue MasterCard, Visa and other cards are rushing to stanch the bleeding, even as options once easily tapped by borrowers to pay off credit card obligations, like home equity lines or the ability to transfer balances to a new card, dry up.

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.

The depth of the financial crisis has shocked a credit-hooked nation into rethinking its habits. Many families once content to buy now and pay later are eager to trim their reliance on credit cards. The Treasury Department, which is spending billions of dollars in taxpayer money to clean up an economic mess brought on in part by all sorts of easy credit, recently started an advertising campaign inviting consumers to check into the “Bad Credit Hotel,” an online game that teaches the basics of maintaining good credit.

At the same time, the fear factor among lenders has deepened just as the crisis makes it harder for some financially stretched consumers to wean themselves from credit cards for even basic needs, like gas and food.

“We are not going to say, ‘Yahoo, this is over,’ and extend credit like we did without fear,” Jamie Dimon, JPMorgan Chase’s chief executive, said in a recent conference call. “If you’re not fearful, you’re crazy.”

Even those with good credit ratings are not excepted. American Express, which traditionally catered to more upscale cardholders, 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.

“We think it’s prudent given the nature of those products and the economic environment we face,” Daniel Henry, its chief financial officer, said in a recent conference call.

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 a Sony big-screen television as a way of lowering the cost of their redemption prizes.

For less creditworthy customers, issuers are pulling back on promotional offers that allowed borrowers to pay no interest for months 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 profits on card issuers’ riskiest customers. JPMorgan said that it was withdrawing some teaser-rate loans that were only marginally profitable. Discover Financial shortened the duration of its zero-balance offers.

And lenders, over all, are slowing the flood of mail offers to a trickle with moves that would translate for the average American household into about 13 fewer pieces of credit card junk mail a year than its peak in 2005. 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 drive them to the Web, according to data from comScore, an Internet marketing research firm.

“We used to get a couple of offers a week, but I haven’t seen a credit card offer in over a year,” said Brett Barry, who owns a real estate agency outside Phoenix and described his credit record as strong. “What blows me away is these companies are in the business of extending credit, but they don’t want to do it for me.”

Mr. Barry said that, without any notice, American Express had reduced the credit limit on his business and personal credit card at least four times in the last year, which he said had lowered his credit score. The moves have also made it difficult for him to manage his payroll and budget, he said.

“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.

“The last time credit costs spiked, the late fees were much lower, so card issuers could turn to that and reprice more nimbly,” a Morgan Stanley analyst, Betsy Graseck, said. “There is just more scrutiny now, and coming after the subprime mortgage crisis, the world is more sensitive to the way lenders behave.”

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dupe

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.

Yeah, we've got a real shortage of junk mail there.

I think it's more important than ever to get all those cards out and use them every month.

Are there people from Texas, North Carolina, or other better real estate areas? I am trying to see if the banks are pulling out nationwide or targetting the high foreclosures areas.

bleez said: I think it's more important than ever to get all those cards out and use them every month.

It's a pita but that's exactly what we're doing. Not every month but we're breaking out old cards and putting small charges on them.

So far in our 5 person family only 1 person has had a card closed for inactivity (good ol' HSBC) but I don't want to take
chances with old cards with long histories.

It's tricky bc you don't want to have too many cards with balances reporting- so we've been making small charges and then
paying off before the cycle closes.

We're also alternating our secondary spender card-

As far as pre-approved offers for new cards go we used to fill the shredder with them every month- but we've gone from 3-5 per week to 2-4 per month now.

LaJollaInvestor said: bleez said: I think it's more important than ever to get all those cards out and use them every month.


It's a pita but that's exactly what we're doing. Not every month but we're breaking out old cards and putting small charges on them.

So far in our 5 person family only 1 person has had a card closed for inactivity (good ol' HSBC) but I don't want to take
chances with old cards with long histories.

It's tricky bc you don't want to have too many cards with balances reporting- so we've been making small charges and then
paying off before the cycle closes.

We're also alternating our secondary spender card-

As far as pre-approved offers for new cards go we used to fill the shredder with them every month- but we've gone from 3-5 per week to 2-4 per month now.I've got three 1" binder clips holding 20+ cards in each clip.

Binder 1 = AOR1.0 & 2.0 zero balance/low line cards
Binder 2 = AOR1.0 (Mrs J)
Binder 3 = ALL AOR consolidated cards

Quarterly, I use then pay each deck of cards one time through.

xxjt said: I've received CLR's on BofA and AMEX. Wasn't expecting it since I have 740+ credit score and 10+ year history on the cards with CLR's.

Also; just did an 0% App at US Bank and they pulled a property report on me to verify information! They did approve the application though.

That's interesting xx- what type of property report and how did you discover they ran it?

As savvy as I thought I was when it came to "all things credit" I must admit that only recently have I realized the extent and sophistication of this sub rosa data analysis.

As a friend recently pointed out- "They probably know more about us than we know ourselves"

My AMEX Cl was slashed 50% today...damm

LaJollaInvestor said: The Treasury Department, which is spending billions of dollars in taxpayer money to clean up an economic mess brought on in part by all sorts of easy credit, recently started an advertising campaign inviting consumers to check into the “Bad Credit Hotel,” an online game that teaches the basics of maintaining good credit.

Anyone else have the misfortune of checking into the Bad Credit Hotel game?

LaJollaInvestor said:
Mr. Barry said that, without any notice, American Express had reduced the credit limit on his business and personal credit card at least four times in the last year, which he said had lowered his credit score. somehow I doubt this. Suppose he doesnt really know what he's talking about anyways.

My guess is most die-hard FWers will continue to receive pre-approved CC offers and whatever because we are such a low-risk group to the lenders.

I'm in Raleigh Durham, NC. I have gotten less direct mail in the past 2 weeks, but I am still getting a few 0% offers.
I did receive a letter from Citi telling me to use my cards or lose them, though.

Great article (but very bad news for us), thanks OP.

n/m

prastogi said: CITI is closing my 2 old accounts that I havent used in a long while! uh oh

call and they should let you reopen.

Case by case basis. That could mean anything, everything or nothing. I hate these vague plans.

phillygeek said: So I have a question about doing balance transfers up to the credit line.

If these are personal cards, it's best to stay under 90% so the $28K/$30K is a bit high and you could push $35K/$40K up a bit. Don't forget to include the 3% fee (capped or uncapped) if any. If Bus cards, can generally go much higher than 90%, e.g. leave $250-$1000 available. Again, don't forget about the fee. And monthly payments.

The BT are likely to go through, though not absolutely guaranteed. Possible exception: AMEX has cracked down recently; look around for the thread.

Depending on your appetite for risk, you could first do an AOR (App-O-Rama or application spree) and have more CCS ... though of course you eventually have to pay them back! The other side of risk: search for "Adverse Action", or just "AA" in various AOR threads.