First came the mortgage crisis. Now comes the credit card crunch.
After years of flooding Americans with credit card offers and high credit lines, lenders are sharply curtailing both, just as an eroding U.S. economy squeezes consumers.
The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of unprecedented losses after a gilded era in which it reaped near-record gains from the business of easy credit that it helped create.
It spells more bad news for big overseas companies like Sony and Honda, which rely on American consumers as a major market for their goods.
Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on payments. With companies laying off tens of thousands of workers in the crisis, the industry stands to lose at least an additional $55 billion over the next year and a half, analysts say. The total losses now amount to 5.5 percent of credit card debt outstanding, and they could surpass the 7.9 percent that was reached after the technology bubble burst in 2001.
“If unemployment continues to increase, credit card net charge-offs could exceed historical norms,” said Gary Crittenden, Citigroup’s chief financial officer.
Card-related troubles are also touching Europe. Credit card debt in Britain rose 2.6 percent in August to £65.1 billion, or about $101 billion, from a year earlier, the highest level in just under a year, according to the most recent figures of the British Bankers’ Association. Consumers in Britain now have a record £1.4 trillion of debt, more than the value of country’s gross domestic product.
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 pulling 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 requires 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, since lenders have 30 days to notify their customers, and often wait to do so until 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 gasoline 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.”
The creditworthy are no exception. American Express, which traditionally catered to more-upscale cardholders, said it would be increasing the effective interest rates by two or three 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, chief financial officer of American Express, 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 a Sony big-screen television with less-expensive brands 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 U.S. banking regulators and Congress.
The regulations, while beneficial to consumers, will curb profits on credit companies’ riskiest customers. JPMorgan said it was withdrawing some of its 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.
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Lenders limit use of credit cards
By Eric Dash
29 October 2008
First came the mortgage crisis. Now comes the credit card crunch.
After years of flooding Americans with credit card offers and high credit lines, lenders are sharply curtailing both, just as an eroding U.S. economy squeezes consumers.
The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of unprecedented losses after a gilded era in which it reaped near-record gains from the business of easy credit that it helped create.
It spells more bad news for big overseas companies like Sony and Honda, which rely on American consumers as a major market for their goods.
Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on payments. With companies laying off tens of thousands of workers in the crisis, the industry stands to lose at least an additional $55 billion over the next year and a half, analysts say. The total losses now amount to 5.5 percent of credit card debt outstanding, and they could surpass the 7.9 percent that was reached after the technology bubble burst in 2001.
“If unemployment continues to increase, credit card net charge-offs could exceed historical norms,” said Gary Crittenden, Citigroup’s chief financial officer.
Card-related troubles are also touching Europe. Credit card debt in Britain rose 2.6 percent in August to £65.1 billion, or about $101 billion, from a year earlier, the highest level in just under a year, according to the most recent figures of the British Bankers’ Association. Consumers in Britain now have a record £1.4 trillion of debt, more than the value of country’s gross domestic product.
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 pulling 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 requires 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, since lenders have 30 days to notify their customers, and often wait to do so until 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 gasoline 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.”
The creditworthy are no exception. American Express, which traditionally catered to more-upscale cardholders, said it would be increasing the effective interest rates by two or three 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, chief financial officer of American Express, 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 a Sony big-screen television with less-expensive brands 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 U.S. banking regulators and Congress.
The regulations, while beneficial to consumers, will curb profits on credit companies’ riskiest customers. JPMorgan said it was withdrawing some of its 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.
Julia Werdgier contributed from London.
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