Plastic: The Next Credit Crunch

The writing is on the wall. Last week American Express was offering $300 for people to pay off their credit card balance. Don’t you think other credit card companies will follow suit? When and if credit card companies start contracting credit lines, it is obvious consumer spending will fall even further thereby hurting the U.S. economy. The next domino is ready to fall.

How many times over the past few years was your mailbox full of offers from credit card companies? I think even my dog received an offer… Now all these offers are a thing of the past. Even good credit risk people will probably experience a tightening of their credit lines or even losing them completely. There have been publications stating that available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. There are estimates that over $2 trillion of credit-card lines will be cut within 2009, and $2.7 trillion by the end of 2010.

Credit lines outstanding currently in the US is approx. $5 trillion. Can you imagine the sheer magnitude of this debt? How many times around the world would it be if one would lay these dollars next to each other?

Do you think credit card companies will survive… Or will the new thing be debit cards that actually take money instantly out of our accounts? I am looking at a company that is working on this technology. Times seem to be changing.

Comments

[Larry House:]

Not only is the writing on the wall, it is also in the Wall Street Journal this morning, written by Meredith Whitney and condensed on CNBC online. She's even more convincing as a bank analyst of some reputation. Some of your figures are directly from her work.

Mar 10 05:44 PM

[Karen Consumer:]

The big credit card companies will be a thing of the past. In the future, stores still in business will go back to in-store credit cards that they control in-house, and survivor banks may offer secured credit cards or unsecured credit cards with obscene requirements. But the days of bundling future earnings (specifically credit card payments) for sale to the highest bidder (dumbest buyer) are over.

Mar 10 06:42 PM

[jstratt:]

It seems to me that Credit card losses are overblown. Lets say that 20% of credit card debt is uncollectable. I am not sure any initial capital is lost.

Strip out the interest at huge rates and the fees and there may not be a loss of capital at all. Right now we are talking about less than 10% writeoffs by the reports I read and it tracks unemployment closely.

Mar 10 08:00 PM

[DiggerUK:]

In early September last year I was in Iceland on holiday, it seemed that something was up. Never realised until a few days after I got back exactly what.

An interesting story I was told on a number of occasions, was the extension of credit card companies period of settling payments to retailers.

In May retailers were told it would be lengthened to 5 days. Many told of having to wait up to 30 days by September. This has made me think of what would happen if retailers stopped taking payment by credit cards.

Customers would have to pay by cash, or by debit card as the author of this article seems interested in. Such payment methods are well used here in UK. Retailers love it as they get paid instantly into their bank, and pay a fixed fee of about 30 pence (40 cents) per transaction. As against the 4/5% to the credit card companies.

Up till now the credit card companies have had to go on the money markets to borrow the cash to pay the retailers. If trade moves away from credit cards, to cash or debit cards, could the banks handle the increase in a retail cash economy. I think not.

Mar 11 10:30 AM