Credit Card Crunch: Creating a New Generation of Subprime

We're here to point out a potential unforeseen consequence of credit cards as the next credit crunch. The developments of credit card companies raising interest rates, cutting credit lines, and closing inactive accounts altogether has many consequences: Firstly, and most obviously, consumer confidence and consumer spending will drop off. Secondly, as such, the economy as a whole will continue to suffer. Lastly, and most unforeseen, FICO (credit) scores most likely will be reduced and millions of American consumers will essentially be 'downgraded' by way of their new, lower credit scores, further inhibiting their access to future credit. Many people are focused on how these actions will affect consumer spending (and rightly so). But, we also want to turn the focus to the decrease in consumer liquidity and how overly reliant consumers are on credit cards for cash-flow management.

Credit Cards Are the Next Credit Crunch

We'll break this down in the piece below, but first, some background. If you don't know who Meredith Whitney is, then shame on you. She has been one of the best analysts on all things financial, nailing the trouble at Citigroup (C) when no one wanted to believe it. She is the dominatrix of doom and she has recently put out a report on credit card companies, stating that financial institutions could cut up to $2.7 trillion in lines of credit that have been typically available to consumers. The bulk of her message was that this could happen by 2010 and that it would severely dampen consumer spending. Not only would it affect consumers, but it would affect small businesses as well, who often rely on credit cards to actively finance their day to day activities.

We've been harping on this issue for a while under the notion that credit cards are the next credit crunch. Companies like Bank of America (BAC), American Express (AXP), and Capital One (COF) have reported increase after increase in charge-offs and delinquencies in their credit card units. Obviously, rising unemployment and a hell of a recession are only going to add to that. Head of JPMorgan (JPM) Jamie Dimon has even flat out admitted that credit cards are going to be a house of pain for his company in 2009 and possibly beyond. We've posted on this issue back in August of 2008 and will continue to harp on it until we see material improvement. But, while more people seem to be coming around to the fact that credit cards will indeed be a big problem going forward, the magnitude of the issue still needs to be highlighted.

Using credit cards for everyday 'emergencies'

Many American consumers were living on a debt binge by purchasing everything on credit cards and slowly paying them off over time (or not paying them off at all). America = consumerism. You also have a second tier of consumers who would typically pay with cash or debit card, who have now been struck by hard times. When push comes to shove and you've got to make the essential purchase of food, you fall on the credit card for emergencies. And, with this economy, there are a lot of consumers pushing the big red 'emergency' button.

The problem here is that the credit card companies are trying to fight off rampant delinquencies and non-payers by all means necessary. The best example of this would be American Express offering you $300 to pay off your bills and close your account (to a limited number of accounts). This is the deleveraging world. Markets are deleveraging, hedge funds are deleveraging, and consumers are deleveraging. The credit card companies are no different. They simply took on too many customers (especially of poor credit quality) and offered everyone credit lines that were much larger than necessary. They are now correcting their errors.

But, as such, the consumer suffers and their purchasing power now decreases exponentially. If you didn't have enough money for that flat screen TV, you put it on your credit card with your $10,000 line of credit. But now, that $10,000 line of credit might be chopped down to only $4,000 and you've already racked up a lot of charges on there. Where do you turn now? How do you purchase your sacred flat screen TV? You can't. (In the end, that might not necessarily be such a bad thing as it brings consumers back to a realistic level of spending, but that's a topic for a whole 'nother post).

Available lines of credit were cut by almost $500 billion in Q4 of 2008. Whitney acknowledges that and says her estimate might be too conservative given how fast credit lines are shrinking. In the US there is about $5 trillion in credit card lines and $800 billion or so of that is being drawn upon right now. This affects overall consumer liquidity as consumers become even more squeezed in an already penny pinching environment. And, it's not the reduction in credit lines that affects things. Creditors are also shutting down credit card accounts completely, due to inactivity (which, by the way, is their legal right). Additionally, they are raising interest rates on numerous accounts in an attempt to recoup whatever losses they can. Unfortunately, this move will put many borrowers even further underwater, decreasing the chances they can pay off their cards. But, there is also something else that could be an unforeseen consequence: a nightmare-ish decrease in consumer credit ratings (FICO scores) country-wide.

What is a FICO Score?

We should preface this section with a disclaimer: We're by no means FICO experts and FICO calculation is almost like a mad-science. We've simply done a ton of research and are presenting theoretical examples that could potentially lower credit scores of many consumers. Feel free to chime in if you're an über-expert on the matter. If you are unfamiliar with FICO scores, it is essentially your credit rating as a consumer; a number slapped across your forehead that tells creditors how likely you are to pay them back. The pure definition of a FICO score:

"A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable. (And more info per mtg-net if you want it)"

Why FICO Scores Matter

Quite literally, your FICO score is your access to credit. The FICO score ranges from 300 to 850; the higher the score, the better (with 850 being the ideal score). You can essentially break down the FICO score range into four tiers:

1. Excellent credit: 700-850. People with this score will receive the best interest rates, aren't likely to default, and should have no problems accessing future credit.
2. Good/Decent credit: 600-699. People with scores in this range will pretty much get a normal loan and usually won't be denied.
3. Poor credit: 500-599. This is not the worst part to be on the ladder, but banks start to get you in their back pocket here and credit availability could be an issue.
4. Dismal credit: 499 and below. Terms for people with these scores will be absolutely brutal, if they are even given credit at all.

We've kind of generalized the list of tiers, but you get the picture. So, why do FICO scores matter here? Well, if you look closely, you'll see some big differences in terms of interest rates offered on loans and overall availability of credit as you move from one FICO score category to another. After all, don't forget that a sub-600 credit score was deemed as sub-prime by many. Let's take a look at a theoretical $200,000 30-year fixed mortgage (national average as of March 24th) across the range of credit scores to see the various APR's offered thanks to a graphic from myfico.com.

(click to enlarge)

Keep in mind that this graphic only encompasses an 'upper tier' of FICO scores. You'll notice that they only go down to a score of 620 on their list. And, even so, a consumer who has a score of 620 is paying 1.589% more in APR than someone with a 760 score. You can only imagine what the APRs are going to be like on FICO scores lower than 620 as you fall into the 'fair' and 'poor' credit ratings. So, not only does a lower FICO score mean you'll be paying a higher APR, but you'll also have less overall access to future credit as lenders will be more inclined to turn you down in this environment of tightening credit standards.

Why FICO Scores Will Decrease

Now that you've got an overview of how a lower FICO score is "bad-news-bears," let's examine why cutting consumer credit lines will essentially downgrade consumers' credit ratings. Your FICO score is determined by a myriad of factors. But, this chart breaks down just how the score is calculated:

(click to enlarge)

Now, as you can see, the two biggest pieces of the pie are 'on-time payments' (35% of the FICO score) and 'capacity used' (30% of the score). On-time payments are obviously in the hands of the consumer themselves. And, many pundits have already accounted for the fact that consumers will be delinquent on their bills or flat-out won't pay them due to economic hardship, etc. This is the well known part of the credit card crunch. What hasn't really been talked about is the second biggest piece of the pie: Capacity used.

Capacity used is simply a calculation of how much of your available credit lines you are using. This utilization ratio can be affected by two inputs: how much you're charging to your cards and how high your credit limits are. So, a lower ratio of capacity used is obviously better. The lower your utilization ratio, the better your FICO score can be. You can achieve such a ratio by having either lower balances or increasing your available credit; or both. Now, we've already seen from above that creditors will be cutting available credit lines all over the place and even closing down some accounts completely. This immediately increases a consumer's utilization ratio even if their rate of spending remains constant.

An example: You spend $1,000 on your credit card each month and your available credit line is $10,000. Currently, your utilization ratio (capacity used) is only 0.1, or 10% each month. Fast forward to next month and you're still spending $1,000 on your credit card. Then, the credit card company comes through and axes your available credit down to only $4,000. Even though your spending rate has stayed the same, your utilization rate is now .25, or 25%. Once again, even though your spending was constant, the credit card company's actions have now just sent your utilization rate up 2.5x. And, as such, that 30% of your FICO score determined by capacity used (the second largest component in computing your score) has just sent your score down (possibly even to a lower-tier of ratings).

Next, look at the same example wherein the consumer ramps up the amount they charge to their credit card due to emergency and economic hardship. Before, they were spending $1,000 on a $10,000 credit line. Now, their line has been chopped down to $4,000 and their spending has doubled to $2,000 due to hardship brought on by the recession. Purchases they would normally pay for in cash now have to be put on the 'emergency card.' In this scenario, their utilization rate has now risen to .5, or 50%. Their utilization ratio has now increased five-fold! Such a large increase in capacity used will undoubtedly affect their FICO score in a negative way.

So, while others may be focused on the "amount charged" input in the capacity used equation, we are focused on the "available credit" portion of the equation. The amount charged on a card is a variable input as it can fluctuate on any given month. Available credit though, is more often than not static as consumers have their credit lines in place (with a few exceptions like opening new cards). The problem is, though, that credit card companies are no longer leaving credit availability relatively static. Creditors have already started cutting available credit and they will only continue to do so, as they struggle with rising charge-offs and delinquencies. This 'fad' has already run rampant, as I can't even begin to tell you how many people I've read about that have had available lines clipped and have even had cards closed down altogether due to inactivity.

Think about that for a second. If they close down a card completely, not only have you lost that available credit line which affects the 30% of the FICO equation, but you've also lost a portion of the 15% 'length of credit history' part of the equation in the pie chart above (or all of that history if it's your only card). So, when they completely close an account, you now have negative readings on up to 45% of the inputs used to calculate your FICO score, rather than just the 30% in the theoretical scenarios we've outlined above. And, this is all on top of the negative scores many consumers will receive on the 35% allocation of the score for "on-time payments" since many have missed payments and delinquencies are continually rising.

If you take all of these factors into consideration, the categories with the highest weighting in FICO scoring most likely have and will be negatively affected, leaving consumers with lower scores. Just how much lower could credit scores go? Ultimately, all we can do is guess. The degree of severity lies buried within the madness known as FICO. Our inclination is that it most likely will have a meaningful impact.

The Crux of the Credit Card Crunch

Utilization ratios (capacity used) will skyrocket and thus negatively affect the 2nd largest input (30%) in calculating consumers' FICO scores. Additionally, closed accounts could negatively affect up to 45% of the FICO calculation, possibly bringing down one's score that much more. As such, FICO scores across the country will most likely decrease, landing many Americans in a credit tier below their current status, thus further restraining their access to credit. Why does this all matter? Well, we are just recently working off the effects of a defaulting sub-prime borrower. If FICO scores decrease en masse, we could shift a whole new batch of American consumers from the 'fair' tier to the 'sub-prime' tier. Not to mention, the liquidity crunch consumers are facing becomes that much tighter as companies put the squeeze on consumers, increasing the probability that said consumers will default.

So, to recap: Credit card lines drying up is bad for the consumer because it takes away their liquidity and ability to spend since they often use cards for cash-flow management. This decrease in consumer spending is in turn obviously bad for the economy. Lastly, such a reduction in available credit could negatively impact consumers' credit ratings (FICO scores), 'downgrading' consumers to lower credit tiers, raising the interest rates they are charged, and decreasing their overall access to future credit. And, all of the above can increase the probability they will default. The creditors quite literally own consumers with bad credit; it's as simple as that.

While things might not turn out to be as extreme as we've laid out above, there will nonetheless be consequences. In an environment where companies are being downgraded left and right, we're downgrading the credit ratings of the American consumer. Credit just got that much harder to procure.

Comments

[fnu149:]

very well analysis.

Mar 26 05:32 AM

[logicalthought:]

Credit card borrowers can't pay? Hey, no problem-- the U.S. government can guarantee THOSE receivables, too... I mean, it's only money!

Mar 26 08:31 AM

[Skip Olinger:]

Interesting detail on FICO but this is old news and not very helpful in stock picking. How bad can the credit card losses get at JPM? What effect on earnings will that have? Will it take the company under? Are they under reserved? At $12 per share, there could be an awful lot of pain baked into that price. Is there a value investment opportunity there even if write offs go to 10-12%? What happens of consumer spending improves in 2-3 years? Or will the company go under?

How this information affects specific stocks would be more helpful.

Mar 26 09:50 AM

[Andy Abraham:]

All of the dominoes will fall ...student loans.. commercial loans... credit cards... Just think of the implications of the implosion of credit in our daily life as you stated. Truly unbelievable times.

Mar 26 10:05 AM

[everyotherc...:]

Excellent article.

The conclusion that less borrowing capacity will be available to consumers is correct, and the same should be said for second mortgage lines of credit which were issued abundently over the past few years. Their limits will also be cut. The issue should really be whether the banks have adequately reserved for this potential, and my view is that at this point in time most have. There's another issue on the credit cards, too; banks have a history of pricing up to their actual and expected defaults. The pricing increment, to both good and bad risk customers, embraces the higher losses.

The issue here shouldn't be the banks; they've either reserved adequately at this point or have the ability to price out of their problem. The issue is macro----the effect the lower credit card lines will have on national consumption.

Mar 26 10:14 AM

[RSAAKS:]

when banks are allowed to charge 25% interest against their cost of funds at less than 3-4%, greed overtakes and reckless lending begins. That is what we had in last few years, every month there were on average 30-40 card offers in my bail box. Many in my shoes probably had those cards issued and will never be able to pay using 20+% interest rate. Greed could only go so far. Perhaps banks will learn to loan money to those who have HIGH probability of paying heir loans, and charge a reasonable rate for it. Those who can pay will not accept 25% rate, those who cannot pay, it is not worth charging any rate-meaning no loans.

Mar 26 10:23 AM

[Delta Don:]

Untill Common Sennse replaces greed there will be problems!

Mar 26 10:46 AM

[James Wilson:]

Let Taxpayers write off GOOD WILL just like the big banks.

Good will only has any value if someone is looking to sell their business or to buy a business. How in the hell was losses of Good Will figured the last 3 quarters on the banks taxes. What base was used for the value ?

I would love to hold court for sub prime lenders in the woods with a rope.

Mar 26 11:46 AM

[Market Folly:]

Skip Olinger,

Not every article out there has to be about stock picking, does it? Do you rely on articles from others to make your decisions for you? We've laid out a macro framework and have left the rest up for you to decide. If you're desperate for stock picks, we'd recommend checking out some of our older articles on shorting the credit card companies (COF in particular, which we had shorted way back at $45 but are currently not involved in). Just click some of the links in the piece above. But, ideally, you'll want to look at credit card companies and banks with large credit card exposure and make your own decision. We currently have no position in any, as we are waiting for more attractive levels to establish new shorts.

Mar 26 11:51 AM

[Larry House:]

Timely piece, and I like that you gave credit to the sources of your info. Our whole way of using and thinking about credit is changing. How can we have an economic rebound and actually grow the economy when this is happening to consumers--70% of economic activity? I have had increases in interest rates on two credit lines--no credit limit reductions-and I have excellent credit. I am building up savings even more and using the debit card more, even when I pay off credit cards regularly or carry small balances. We are getting back to a cash economy. It will be painful, but it is probably a good thing in the long run. We will have to save the money for purchases instead of charging them. We will save a lot on interest, but we must save more and stay very liquid. Cash IS king in more than one respect.

Mar 26 12:10 PM

[Rix:]

I was once in over my head with credit, so I'm well aware of the circumstances that don't make this the easiest thing in the world to do.

The rising interest rates of cards and the lowering of credit limits won't affect you for too long, if you can get and keep the total balance of used credit 30% or less than your total available credit, and you get in the habit of paying off your balance each month.

FYI, the editor(s) need(s) a refresher on comma usage, particulary around "and" and "but." And instead of nightmare-ish, the correct term is "nightmarish."

Mar 26 01:47 PM

[mizzoufan:]

Isn't the real solution for Fair, Issac to adjust their "black box algorithm to adjust credit scores based on reduced credit lines. Say I have 10 credit cards and I cancel 5 that probably doesn't affect by ability/willingness to pay back a loan. Credit score algorithms need to change and conditions in society change.

Mar 26 02:10 PM

[H.J. Huneycutt:]

Credit card earnings will suffer as deliniquencies increase, but this article ignores the fact that the market has priced (arguably overpriced) most of that in right now. Discover (DFS) is a deal in the $6 - 7 range. I might even buy it in real life if it were to dip down to the $4 or $5 mark.

Mar 26 02:22 PM

[Francisco M...:]

The credit card crunch is coming and it will have a severe consequence as it is directly tight to the ability of consumers being able to freely buy services and every day necessities. Now, that the "Home ATM (home equity line)" is a thing of the past and a looming credit card crunch the outlook is rather bleak.

Mar 26 02:38 PM

[Karen Consumer:]

I agree with Mizzoufan. After the recession and the 2010 credit card "help" from congress, banks and credit card companies will need all new algorithms in order not just to provide credit but to stay viable.

A person who walks away from their house but pays their credit is different from a person who keeps their house and lets everything else go (ability/willingness wise). A person who pays off all their cards on time and gets higher interest rates and lower credit availability or complete loss of credit availability isn't going to run back to the same organization in two years to reapply for that line of credit. A person who stops paying on their credit cards to pay for food can still get household necessities on lay-a-way, a payday loan, or go to a pawn shop for emergency cash.

What we're seeing (IMO) is additional irrationality on the part of banks and credit issuers. Not happy with shooting themselves in the foot with derivatives from bad home loans, they are now determined to shoot themselves in the kneecaps with credit cards. You can treat the consumer like dirt for a while, but they won't tolerate it forever.

Mar 26 03:05 PM

[bricki:]

What the author is missing is the behavior of the consumer in the current recession. The fact is that credit defaults are actually decreasing, credit card debt is being paid off at record rates and savings rates are shooting up. This makes the decreases in lines of credit a moot point because most people aren't using them.

Mar 26 03:45 PM

[CreditMatte...:]

Excellent article. One thing about length of credit, though.

When an account is closed by the card issuer, the closed account continues to age. Thus, if the account is closed today -- and the account is ten years old -- it will be 20 years old when it finally falls off your credit report. Up until it does fall off the report, you'll be given full credit (pun intended) for the age associated with that account.

Therefore, when a card issuer closes your account, we worry most about the lost available credit. We don't worry about the age component until the tradeline actually falls off the report some ten years down the road.

Mar 26 03:52 PM

[robert.b.fe...:]

Unfortunately those least able to deal with situations like this are the very ones bearing the brunt of them. My catpital one card raised the rate from 7.7% to 14% for no reason at all. I called them to find out what was going on and was told that they were raising rates across the board and I could close the account to opt out. I told them that they could maintain the rate or the account would migrate to another underwriter at 0% promotional rate. The rate is now at 7.7% which I'm not complaining about. However those folks who are being squeezed may not have any leverage and will just have to pay the higher rate or default. Good article.

Mar 26 04:38 PM

[schlumpf:]

No problem, they print more money. Or a new good Geithnenke idea.
Cut be a printing press for every bank.

Mar 26 04:43 PM

[maryanne:]

Excellent article and fully relevant to the financial crisis and investing. Chase and Citibank closed over 5 of my idle credit cards with NO warning last November-December. I quickly inventoried all the remaining cards and made small purchases (ie, supermarket and EBAY) to keep them "live". Did not seem to dent too much, my FICO score last week is 767. I'm going to refinance an Option ARM to fixed (Unlike many of those borrowers, I was fully aware of the risks and how it works, besides my mortgage is backed up by 4X the assets)

Mar 26 07:31 PM

[batmant:]

Credit Card Crunch? I don't think this is a big problem for many banks, AXP or even COF. Unless this article recommends people to short these companies, there is no point to emphasize this. Everybody is expecting this for sometime now. All financial stocks are at extremely low level. Any short position now will put one in a short squeeze. I'm sure short interests has gone up to a few millions in the last 13 days for these companies and Geithner will not be able to do anything. However, don't expect AXP or COF will fall to 1 dollar again. People tried with C and BAC and now with WFC, but they will never fail!

Mar 26 08:06 PM

[Dr. O:]

I use credit cards for everyday purchases because I only use checks to pay bills, only use a debit card to obtain cash. It's safer using a credit card, in terms of consumer protections available.

Never had a late payment. Can't remember the last time I carried a balance. Definitely a high-FICO score. Nonetheless, Capital One Financial sent me a notice that my monthly APR on ordinary purchases was going from 7.99% to 17.99% beginning mid-May.

I had to reread this a couple of times. I became concerned that something negative had happened to my credit rating, as one late payment can trigger all your credit providers to raise their rates. Nope. No problems from my end.

I could only conclude that Captial One didn't want someone who paid their balances off every month, and, had no late payments. They weren't making money off of me, I guess.

I canceled the card, a Visa. My default credit card now is an Amex Card. Citi still hasn't touched my Mastercard or its credit line, but I rarely use it.

Something is going on in credit card land.

Mar 27 11:05 AM

[Francisco M...:]

I personally believe the credit card crunch could be very severe indeed. As you pointed out correctly - credit cards are a last resort financing tool when the paycheck is not sufficient to cover the everyday needs. I personally also believe credit card companies need to change their loan shark tactics and stop charging those enormous interest rates. It is a shame that our regulators don't get tougher on this particular issue. Interest rates are down and credit card companies are still charging in some cases north of 30% APR. Food for thought.

Mar 27 11:42 AM

[ButWhy:]

It's just another 'tax' on the middle class. As the author points out, who understands FICO scores? If banks can squeeze Joe Sixpack's FICO score down, (even though he pays on time), Joe's interest rates go up, and the banks/credit card companies pay more tax in earned income.

Joe is financing the recovery; Obama and Congress use smoke and mirrors to make him think only the rich, (who can afford to pay cash) are getting taxed.

Congress should look at how this FICO issue is a sham, but why would they? Higher earnings=higher taxes. And, correct me if I'm wrong, but doesn't 'cough' the taxpayer, via the government. own most big banks?

Mar 27 12:19 PM

[CJJ:]

A few quick hits:
-Credit scores are a load of crap. If you don't think they are going to be changed as a result of this recession/depression you are stupid.
-The fact people are whining about dormant cards being closed is assanine. Again to the above credit scores will be adjusted in the near future so keeping lines of credit open is not a "good thing".
-Credit card companies are hiking their rates because they can and the rules are going to change soon. I agree its a bad move from the credit card users view but it helps the issuer bottom line.
-What exactly is the problem with scaling available credit back 50% if its utilization is under 20%? How do you not see that as a good thing? This still leaves over 50% non used balance.
-Cetin nails it on the head, MOST people have small balances and much of increased savings is going to paying off credit.
-People who do have large balances on many credit cards are criminals. Not sure why we are crying about them.

There are mountains of problems out there, not sure why I repeatedly have to read about this molehill. Isn't the whole goal here to allow credit for creditworthy people? Much of the complaints come from people who have been gaming the system and see their days numbered.

Mar 27 01:14 PM

[DussaultCap...:]

I'm not convinced that FICO scores will drop en masse when credit card companies trim credit lines. Yes, it will lead to higher credit utilization ratios. However, if everyone's credit utilization ratio rises then FICO will have to adjust the scoring model to compensate.

If the low risk folks that never default end up with higher utilization ratios then why would a scoring model penalize someone else for having a similar credit profile? The model will look for differences in credit profiles that are predictors of default. If credit utilization ratios rise across the board that does not become a differentiating factor for prediction of default.

The models are constantly being tweaked and will change with the times - though I don't know how long this takes. It would be interesting to have a FICO expert weigh in, but these folks are tight lipped due to proprietary nature of the biz.

Mar 27 02:01 PM

[William Cowie:]

Great article.

How about getting Fair Isaac & Co. to replace Moody's and S&P for business credit ratings?

Mar 27 02:13 PM

[Dave Wrixon:]

Yes, they hiked mine once two often, the most greedy being Capital One and Amex.

I am going to be paying down $50K in credit card debt early next month and the cards are going for good!


On Mar 26 10:23 AM User 55065 wrote:

> when banks are allowed to charge 25% interest against their cost
> of funds at less than 3-4%, greed overtakes and reckless lending
> begins. That is what we had in last few years, every month there
> were on average 30-40 card offers in my bail box. Many in my shoes
> probably had those cards issued and will never be able to pay using
> 20+% interest rate. Greed could only go so far. Perhaps banks will
> learn to loan money to those who have HIGH probability of paying
> heir loans, and charge a reasonable rate for it. Those who can pay
> will not accept 25% rate, those who cannot pay, it is not worth charging
> any rate-meaning no loans.

Mar 27 03:28 PM

[Dave Wrixon:]

Yes, they hiked mine once two often, the most greedy being Capital One and Amex.

I am going to be paying down $50K in credit card debt early next month and the cards are going for good!


On Mar 26 10:23 AM User 55065 wrote:

> when banks are allowed to charge 25% interest against their cost
> of funds at less than 3-4%, greed overtakes and reckless lending
> begins. That is what we had in last few years, every month there
> were on average 30-40 card offers in my bail box. Many in my shoes
> probably had those cards issued and will never be able to pay using
> 20+% interest rate. Greed could only go so far. Perhaps banks will
> learn to loan money to those who have HIGH probability of paying
> heir loans, and charge a reasonable rate for it. Those who can pay
> will not accept 25% rate, those who cannot pay, it is not worth charging
> any rate-meaning no loans.

Mar 27 03:28 PM

[mogando668:]

1. Few cards charge over 20% upon account opening unless you're already a subprime borrower to start with. Most cards with 20%+ rates are those who had been delinquent.

2. People keep forgetting cards, unlike mortgages or auto-loans, are unsecured loans (e.g. without collateral). Of course the risk premium is higher than your 5% mortgage. Mortgage defaults and they take your house. Auto-loan defaults and they take your car. Bond/debt defaults and they seize residual value of your corporation in liquidation. Card defaults and the bank can't seize jack.

3. User55065 keeps complaining about "greed." Card companies are private entities existing for generating profits for the corporation and returns for shareholders. Why would anyone even issue you a card if it only breaks-even or even a loss-leader? According to your definition, any company that generates a profit or anyone who works for more than minimum wage = "greed overtakes".

4. One pays interests on their cards only if they can't pay in full each month. Is it the card company's fault that you're not spending within your means?

5. User55065, if you dislike cards so much, why not cut up all your cards and use debit and cash from now on? No point of being a drug addict and complaining about its harm.



On Mar 26 10:23 AM User 55065 wrote:

> when banks are allowed to charge 25% interest against their cost
> of funds at less than 3-4%, greed overtakes and reckless lending
> begins. That is what we had in last few years, every month there
> were on average 30-40 card offers in my bail box. Many in my shoes
> probably had those cards issued and will never be able to pay using
> 20+% interest rate. Greed could only go so far. Perhaps banks will
> learn to loan money to those who have HIGH probability of paying
> heir loans, and charge a reasonable rate for it. Those who can pay
> will not accept 25% rate, those who cannot pay, it is not worth charging
> any rate-meaning no loans.

Mar 27 04:23 PM

[nova:]

America consumers have lived well above their heads for a long time. It could not go forever. It is this simple.

How long will Chinese and Germans subsidize US consumers who cannot pay and have no desire to pay? Thanks to Bush and Obama they did realize that they were conned.

The sooner we clear the deck and realize that we must pay for things we buy and/or get is better for all of us.

The only message I got from this article was that we have a long way down. Well, we knew it.

In conclusion, this economic & political crisis will not be over before US consumers & businesses & government financial discipline is restored regardless what our politicians say or do. So far, there is no light at the end of this crisis tunnel.

Mar 27 05:36 PM

[Emerson:]

You, like many people writing today, take an insolent approach to those who use credit. My wife has been sick for over five years and our insurance doesn't cover everything. As one small example, her medication costs me over one thousand dollars a month. I'm retired and my retirement fund has been cut in half. Now tell me, where am I to get the money every month? How dare you compare that to a "sacred flat screen TV." And I'm sure I'm not alone. There are probably millions of Americans, from single parents to the elderly, struggling to make ends meet who need credit to just make it through the day.

Mar 27 06:02 PM

[Pidepiper7:]

All signs point are pointing to the fact that we are finally nearing a bottom in housing. Reports are filing in throughout many of the areas hardest hit by the housing bubble that potential home buyers are rapidly beginning to shop. There is a great deal of pent-up demand from home buyers who have been patiently waiting for home prices to near a bottom. And as with any bottom, there is always a greedy rush to be the first in to get the best prices. Government data, Realtor reports, and anecdotal evidence I've heard suggest that we are nearing this critical inflexion point.

This will serve to not only put a bottom under the housing mortgage banking mess but also will serve to mitigate the negative consequences of consumer credit card defaults.

If we were seeing no signs of a bottom in housing, I'd be concerned about the points you raise. But if things continue to play out as they seem to be, your credit card crunch, although it may affect the speed of our recovery, will not be a game changer.

Housing reports over the coming weeks are where all the action is ...

Mar 27 06:08 PM

[Brian in Wi...:]

I understand the visceral reaction to the credit card issuers, and I have had grave concerns for some time now.

There are a lot of things driving the problem. There has been no effective oversight of the industry for some time now. This (I believe) is based on the banking industry's short term emphasis on revenues. Goals are largely based on a need to take market share and volume. Long term credit risks were not properly understood. Most models are based on relatively recent experiential data. Much like the sub-prime crisis good managers who were risk averse were overtaken by people who got the job done and increased volume. Since there has been nothing but growth of debt and good economics before this crisis the modeling and strategies used to evaluate risk leaned heavily on behavioral statistics, a lot of common sense things (like how someone with 50% of their income in balances could ever pay it off)
were completely ignored. Largely because people paid.

In the good times aggressive practices made money and a risk averse manager does not keep up with the Capital One, Providians, and private label issuers of the world. Risky customers were good. Banks could price them high and they never as a whole charged off at a volume that put your investment at risk. It was a problem making money on good customers as rewards programs got richer and they got more savvy about carrying their balances on 0% life of loan offers.

Bankruptcy reform further emboldened them as they had even less risk in the event of a borrower hitting hard times.

Problem is that as the bottom has been falling out of the economy the old behaviors are no longer holding. The old patterns are not holding today and they are changing faster than the companies can adapt to them. Customers who normally as a group would behave very well are having job losses and can no longer carry their debt burden. They are having a variable rate mortgage price up and are losing their (entirely too small) safety cushion. People who habitually ran up cards and the refinanced with their home equity no longer can. Even incredibly stable customers with great histories seem to be randomly charging off.

Because the banks can not predict the behaviors they have no way to manage yield appropriately. They can put their finger on the fact that zip codes with high jobless rates and/or are most impacted by declining real estate values are going to have higher delinquency. They also see previously inactive accounts that get a balance go bad (the longer the inactivity the worse the risk).

So the firms are being defensive. An inactive account in an area with high unemployment and declining home values is a risk that has no reward. For the most part they are being prudent now.

Which finally brings me to my points after seeing some of the other comments:

1- The banks have encouraged excessive borrowing and have been raking in huge profits. I do not think the risk was priced in when the stocks were doing well. The earnings growth built into prices were insane. Unless they got everyone to borrow or spend every cent they had on their credit card there was no room to grow. Many of the big banks were generating over 30% of the net earnings from credit cards. Investors needed only look at the conditions necessary to actually meet earnings goals to understand it would not last. The abnormal profits of the last 10 years are now becoming normal.

2 - Banks are now being responsible. They should lowering lines and closing accounts. The amount of available credit most people have is insane. If you do not want to bail them out for this too, you should be thankful.

3- If you want to keep your credit cards, do something with them that demonstrates they could make money on you at some point (like buy some stuff and pay it off). It is not a charity. It costs money to maintain an account and reissue plastics. There is no reason for a bank to spend the money to maintain your account if you have not used it in 5 years and in all likelihood you digging that one out of your drawer means you have hit hard times.

4- Income inequality has gone crazy... there are a lot of people in this world who are not buying flat screens who are working class and have not participated in the boom. But prices of education, homes and food have exploded around them (largely due to the explosion of liquidity). It is easy to say that they are deadbeats, but not all of them are. It has become how some in the middle class have to cope with declining real wages.

5- We need real economic growth that is not focused on consumerism and theoretical money. We need leadership in this country that does not do everything their campaign contributors and friends in industry request. This was a house of cards and the real winners are China and banking executives, we should not blame the little guy... generally speaking they will be the victim.

Mar 27 08:34 PM

[Grendeth:]

First of all, credit cards should be irrelavant to your credit needs. Smart people know that getting into any form of debt with these cards are a pitfall. 13% interest does not make sense.

Americans have been heavily relying on credit cards & their debt has been a source of many discussions. If the banks have now finally gotten hold of the fact that many of these credit card debt are now bad debt & if people are even getting smarter in realizing that getting into such debt is bad, it is a win-win situation.

These credit scores & FICO is what has gotten America into this mortgage debt. Anyone & I mean anyone was able to buy a house, some even 2 (or 3) base on semi decent FICO scores & little savings in the bank.

People in most other countries, you need at least 20-30% down payment & then the talking starts about buying a house. In the US, its 0 down at 0.9% finanacing to buy a car & almost the same for a house.

Well the $1000 a month clerk having a $20K credit line, it all making sense now why credit is drying up. It is no longer making business sense to just offer all this free unchecked credit.

Don't be fooled folks, used your credit card for sure, but pay it up in FULL every month to avoid any form of charges from the banks.

So it is good if the banks are now starting to reign in on uncontrolled credit card debt. It should have started earlier.

Mar 27 09:27 PM

[Chad Gray_:]

Thorough write-up, but I agree with Dussault Capital's comment above about the "en masse" drop in FICO scores. Very possible that Fair Isaac adjusts the magic formula and the curve will shift. This isn't unlike the administrators of the SAT tests who, in the mid 90's, decided to grade the test on a curve to prevent scores from continuing to decline - problem solved.

The other equally likely scenario is that the FICO scores do drop in aggregate causing credit card companies to lower their cutoff. They've got X billions of dollars that they'd like to lend to keep up with their growth targets etc... Much like a university who has X thousands of seats to fill and the bar gets drawn accordingly.

Of course this is all an inconsequential argument. At the end of the day, those who had been buying credit ABS's are going to be much more selective, and CDS insurance will be much harder to come by. That will dry up the source of funds available to lend and the overall lending pie will shrink.

Mar 27 09:31 PM

[Grendeth:]

So what does this actually mean because we are both faceless & strictly speaking if I was a bank....do you have a plan or means to pay up?. Sentimentality aside, this is the most basic of arguments here if you are borrowing money & the bank is lending money.


On Mar 27 06:02 PM Emerson wrote:

> You, like many people writing today, take an insolent approach to
> those who use credit. My wife has been sick for over five years and
> our insurance doesn't cover everything. As one small example, her
> medication costs me over one thousand dollars a month. I'm retired
> and my retirement fund has been cut in half. Now tell me, where am
> I to get the money every month? How dare you compare that to a "sacred
> flat screen TV." And I'm sure I'm not alone. There are probably millions
> of Americans, from single parents to the elderly, struggling to make
> ends meet who need credit to just make it through the day.

Mar 27 09:40 PM

[tom007:]

On Mar 27 02:13 PM William Cowie wrote:

> Great article.
>
> How about getting Fair Isaac & Co. to replace Moody's and S&P
> for business credit ratings?

Beautiful - I nominate YOU for SOT.

Mar 27 10:24 PM

[Alfredo Mar...:]

I'm amazed people are so angry at credit card companies. Of course they charge high interest rates, it's a risky loan to make people, there's no collateral.

The credit card companies tell you upfront the interest rate you owe them if you don't pay off your balance. Did you think it was your Constitutional right to have a credit card with no limit and low interest rates?

These people with high credit card debt aren't victims. If you look at what these consumers racked up debt for, it's not necessities like groceries, it's luxury items like plasma TV's and Coach purses. Too many people had an attitude of entitlement and lived far beyond their means.

It will be good for the nation in the long term for this type of attitude to end, but it will no doubt severely hurt the economy in the coming years.

Mar 28 12:38 AM

[RatWatcher:]

'My wife has been sick for over five years and our insurance doesn't cover everything. As one small example, her medication costs me over one thousand dollars a month. I'm retired and my retirement fund has been cut in half. Now tell me, where am I to get the money every month?'

Are you planning to pay this back? Respectfully of your situation, this sounds like you are planning to default. That is not borrowing. It's stealing.

Mar 28 04:35 AM

[trp2:]

Models are rewritten regularly in response to changes in the credit markets. FICO as well as the individual bureaus each have their own models for various purposes. It takes thousands of records from various banks as well as monolines for each loan type and credit behaviors are drawn from histories as well as recent behaviors. Models are created for each type of debt and are then adjusted to the current baseline so there is no disruption in analysis patterns.
Credit lines are adjusted downward for several reasons. Underuse, poor payment indicators in other areas of debt management and probably one of the most heavily weighted reasons for reducing those loans and commitments on their books-- they need to reduce the capital requirements for these riskier unsecured lines.
Many of these lines of credit actually are classified on the banks' books as consumerr but the underwriting premise were small business loans- another reason they are looking to trim their exposure.
As for hidden losses, unsecured loans are required to be charged off at 180 days delinquent . Regulations leave little room for interpretation. Loans packaged and sold are rarely done with recourse except that they are done with reps and warrants for a given period stated in the loan sale documents. If it were done with recourse then it would never have been considered a true sale as the risk never really left the banks' books and would have shown up in their regularly filed call reports, copies which you can see at FFIEC.gov

Mar 28 06:18 AM

[horatio:]

Amex is reducing my credit limit as I pay down my balance. If I were to pay half my balance to better my utilization they would lower my credit limit and raise my utilization back up.

Mar 28 07:43 AM

[The Belgian:]

I just don't get you, folks.

Why do you always buy 'on credit'? Why? Is every American so poor?
Where I live, neither me, my family or any of my friends, we never buy anything 'on credit'. We pay cash. We save first.
It is only a minority in Belgium, that buys consumer goods 'on credit'.
The only things that are socially accepted as a reason to lend, are a house or a car. Anything else is considered 'reckless', even 'a shame'.
I really would like to now, what would happen, if the 'American way of life' (or the Credit way of life) would seize to exist, and you would only buy goods if you had the cash, the way we do. What would happen?
Let me guess...

Mar 28 08:26 AM

[User 357469:]

Its not just Amex doing this. It appears to be the new strategy by credit card companies to keep consumers locked into unreasonably high interest rates. Credit card issuers are a very evil bunch with Amex and Capital One among the very worst of them. I would like nothing better than to see them all fail.

On Mar 28 07:43 AM horatio wrote:

> Amex is reducing my credit limit as I pay down my balance. If I were
> to pay half my balance to better my utilization they would lower
> my credit limit and raise my utilization back up.

Mar 28 10:48 AM

[terp4life:]

Some very interesting points being brought up, what I will say is that while credit companies are closing/lowering credit lines they still have billions of dollars($700+ b of a) of available unused credit. Credit is still available to those who are credit worthy and while yes there might not be as high of a limit as previously, that can only be a good thing since consumers can't be trusted to be responsible with their finances and high credit lines are causing banks more loses in the current environment. Does anyone use a savings account anymore? Its a damned if you do, damned if don't situation with credit. Everyone wants banks to lend more to stimulate the economy and allow consumers to buy yet large #'s of consumers are defaulting on their loans for whatever reasons...

While there are large #'s of chargeoffs of bad debt, i've recently heard that charge offs are starting to show signs of slowing their climb higher, which is obviously good.

What you have to realize also is the process of credit card delinquency which is a 180 day process once past due. During that period your interest rate usually rises to about 20% and this is how banks hedge against defaults. Generally your rate won't go up too much unless you fall past due and if thats the case then that's not the banks fault since your showing increased risky behavior. Also your rate can be high due to a rewards card or previously bad credit. You can always offer to close an account if you feel your rate is too high and do a balance transfer elsewhere. I recently heard 1/3rd of accounts that go 60 days past due are now charging off as bad debt. While these accounts are going past due they collect finances charges that way once they have to either sell the debt for lets say 10-15% or in the rare case arbitrate they aren't getting just 15% but far more. Personally that makes me feel good since i'm a responsible credit user and I don't want my rate going up to off set some other consumers poor choices. Still its a hit on the books but not a complete loss. The sale value of the debt to collection agencies varies on the size of the accounts.

Banks, in response to increased chargeoffs on the credit card side of the business, have started to restructure their risk management sides of the business as well, which is very positive. Collecting on past due accounts has become a science over the years and your large banks b of a, jpm have gotten very good at it. In the past it was a situation where if you aren't behind you can't get help, i.e. programs. Now various companies have restructured to offer preventative measures and created units that focus on up to date, yet risky clients. How they are deemed risky is anyones guess especially if they aren't past due yet, none the less they are shifting towards anticipation instead of reaction.

Also are lower ficos not a bad thing when justified? Why should we give credit to someone with a low fico? Would you want to lend to someone who didn't have good past credit or had a better chance of not paying you your money back? And fico's flucuatate with credit usage and history so its not hard to go from 600 fico to 700 fico within a year with some smart usage of money. As always buyer beware with credit cards, if you fall behind and your rate goes up you only have yourself to blame. Use credit wisely and always remember your credit card company will work with you, espcially in tough times.

Mar 28 11:00 AM

[horatio:]

I have a 4% for life balance transfer offer. I think they are lowering my limits to try an coerce me into paying off the loan early.

On Mar 28 10:48 AM User 357469 wrote:

> Its not just Amex doing this. It appears to be the new strategy by
> credit card companies to keep consumers locked into unreasonably
> high interest rates. Credit card issuers are a very evil bunch with
> Amex and Capital One among the very worst of them. I would like nothing
> better than to see them all fail.
>
> On Mar 28 07:43 AM horatio wrote:

Mar 28 11:09 AM

[horatio:]

Did you not read the article? FICO scores are going lower due to choices the credit card companies make regarding credit limits. It is not just behavior of borrowers.


On Mar 28 11:00 AM terp4life wrote:

>
> Also are lower ficos not a bad thing when justified? Why should
> we give credit to someone with a low fico? Would you want to lend
> to someone who didn't have good past credit or had a better chance
> of not paying you your money back? And fico's flucuatate with credit
> usage and history so its not hard to go from 600 fico to 700 fico
> within a year with some smart usage of money. As always buyer beware
> with credit cards, if you fall behind and your rate goes up you only
> have yourself to blame. Use credit wisely and always remember your
> credit card company will work with you, espcially in tough times.

Mar 28 11:14 AM

[RATHER FISH:]

FICO FICO FICO
What would be the FICO score for the BANKS
Who pays FICO
Where does FICO earn their money and from WHO?
Why are there other CREDIT SCORING companies.

The cc companies are going to run out of customers.
The banks write off (IRS) losses
The banks charge taxpayers 28% on money "YOU' the taxpayers lent the banks @5%.
AND then the banks think the can be TRUSTED.

MIRROR MIRROR ON THE WALL WHO DO TAXPAYERS
TRUST LEAST OF ALL.

Mar 28 11:28 AM

[terp4life:]

Once again its about risk assessment for banks and I don't blame them. Unfortunately a few knuckleheads mess it up for responsible consumers. And if your fico is in the 700s and they lower your credit limits, ficos shouldnt drop too much and its an easily corrected situation...i.e. pay your credit card bill. Even if they do drop your limits you "should" have the means to pay your credit card off within a few months. Bottom line USE YOUR SAVINGS ACCOUNT, whatever happened to 6 months of savings in case you get laid off/unemployed?

And as long as you have a decent score why does your fico score matter unless your getting A) a car, B) a house, C) some other large purchase on credit, or D) another credit card...if I were going to get any of those you bet I'd be making sure my credit was in good shape and paying down my debt beforehand to maximize the chance of a lower interest rate...common sense, plan ahead.

Mar 28 11:53 AM

[terp4life:]

Everyone wants to blame banks...take some intiative and shore up your own credit. Ultimately you have the most impact on your credit.

Mar 28 11:56 AM

[Teutonic Kn...:]

To Market Folly,

Thank you for a substantive and credible article that is so timely.

Yes, I would concur with your assessment. The next Time Bomb is ticking, and ticking fast. BTW, we have the issue, what is your solution?

teutonic

Mar 28 01:07 PM

[MarkitWacha:]

Most people here have the analysis wrong.

Credit is a good thing if you have discipline. For instance, if you see something on sale (25% off) that you've budgeted for anyway, like a mower, then you can use the credit card, pay the 10% in interest over the course of 6 months, and pay it off. Just remember that the credit card companies are not benevolent, and have to make their profit somewhere. So don't be late, and pay the minimum on time.

With this in mind, credit cards have helped me tremendously over the last 4 years. I used the extra credit to leverage up on stock transactions (making a fantastic profit) and even to close on a house when adversity hit. If you aren't saving money or making money with your credit, you need to educate yourself.

My last point is this: if you have credit and aren't using it wisely and with discipline and discretion, you are losing the competition for land and resources against people like me, who will.

This principle of competition is also the reason that the banks are having such a hard time deleveraging. Whichever bank delevers the least will have a competitive advantage over their competition, if and only if they are making a substantial profit on the borrowed funds. I wouldn't want to own Chase (JPM) in this environment. They've also leveraged themselves on commercial mortgages more than most.

Mar 28 01:55 PM

[Dave Wrixon:]

What is actually wrong, is those that can pay off and close out will, and those that cannot will default.

Their own greed will get them into a lose-lose situation. The one thing that the bankers will learn from all this is if they don't lend they die.

My rates were hiked by 4% for no reason whatsoever. I am not in default and my employment prospects are actually better than they have been in a long time, possibly ever. Yes, I do have a few problems in terms of collateral, but mainly because a British bank cannot lend against a property in Czech Republic, so we have had to finance the bloody thing ourselves, and when I am asked if I am a home owner I end up saying no, otherwise I end up looking like a liar.

Cashflows through sales on my speculative investments in internet domains have pretty much dried up in recent months. But these this business has and will yield return in 1K% per annum zone, so finance charges are not a problem until your cashflow is squeezed. But when the going gets tough you find out who you can depend on and who you cannot. Like elephants, WE NEVER FORGET.


On Mar 27 01:14 PM CJJ wrote:

> A few quick hits:
> -Credit scores are a load of crap. If you don't think they are going
> to be changed as a result of this recession/depression you are stupid.
>
> -The fact people are whining about dormant cards being closed is
> assanine. Again to the above credit scores will be adjusted in the
> near future so keeping lines of credit open is not a "good thing".
>
> -Credit card companies are hiking their rates because they can and
> the rules are going to change soon. I agree its a bad move from the
> credit card users view but it helps the issuer bottom line.
> -What exactly is the problem with scaling available credit back 50%
> if its utilization is under 20%? How do you not see that as a good
> thing? This still leaves over 50% non used balance.
> -Cetin nails it on the head, MOST people have small balances and
> much of increased savings is going to paying off credit.
> -People who do have large balances on many credit cards are criminals.
> Not sure why we are crying about them.
>
> There are mountains of problems out there, not sure why I repeatedly
> have to read about this molehill. Isn't the whole goal here to allow
> credit for creditworthy people? Much of the complaints come from
> people who have been gaming the system and see their days numbered.

Mar 28 02:18 PM

[Greg Parker:]

Nice article, I couldn't agree more.

Everybody likes to point their fingers at the government, or blame the banks for the economic mess that we currently find ourselves in, but maybe we as consumers have helped facilitate things more than most of us like to admit. Everybody likes to accuse the banks of being greedy, but ultimately they are in the business to make money for themselves and their shareholders, not to be charitable to the general public.

We are all grown adults, and those of us that have made poor financial choices should take responsibility for them, learn from them, and move on. I am not pointing fingers at everyone, as we are left with a situation where those of us that were responsible with our finances, and made "smart" choices, are the people having to bail out the irresponsible and greedy! I am also not supporting some of the banks actions - they were irresponsible and reckless at times. I believe that if we knew more of what went on behind the scenes and off the balance sheets at many banks, then the markets would fall much more than we have already witnessed, but I do think we as consumers need to take part of the responsibility.

mostlymoneymusings.blo...

The worrying thing is that with the level of unemployment still rising, we are seeing more and more people using credit just to survive and make essential purchases. People have already cut back significantly on large purchases and luxuries and are yet are still forced to rely on credit to pay for food, clothing, energy and healthcare. I think the ride is far from being over...

Mar 28 04:24 PM

[Riley Brock:]

Sorry to say but you are 100% wrong in saying housing is nearing the bottom. The housing bubble is clearly in a bull trap. Watch this 13 minute video and you will see what is coming (it is not good).

Mortgage Meltdown

www.cbsnews.com/video/...

Monthly Mortgage Rate Resets 2007-2016 Chart

consumerist.com/340334...

Main Stages In A Bubble

www.moneyweek.com/inve.../~/media/733B1CBD37D84...


On Mar 27 06:08 PM Pidepiper7 wrote:

> All signs point are pointing to the fact that we are finally nearing
> a bottom in housing. Reports are filing in throughout many of the
> areas hardest hit by the housing bubble that potential home buyers
> are rapidly beginning to shop. There is a great deal of pent-up demand
> from home buyers who have been patiently waiting for home prices
> to near a bottom. And as with any bottom, there is always a greedy
> rush to be the first in to get the best prices. Government data,
> Realtor reports, and anecdotal evidence I've heard suggest that we
> are nearing this critical inflexion point.
>
> This will serve to not only put a bottom under the housing mortgage
> banking mess but also will serve to mitigate the negative consequences
> of consumer credit card defaults.
>
> If we were seeing no signs of a bottom in housing, I'd be concerned
> about the points you raise. But if things continue to play out as
> they seem to be, your credit card crunch, although it may affect
> the speed of our recovery, will not be a game changer.
>
> Housing reports over the coming weeks are where all the action is
> ...
>

Mar 28 07:27 PM

[RATHER FISH:]

Why do cc/banks need tarp money if they were diligent and not greedy.


On Mar 28 08:26 AM The Belgian wrote:

> I just don't get you, folks.
>
> Why do you always buy 'on credit'? Why? Is every American so poor?
>
> Where I live, neither me, my family or any of my friends, we never
> buy anything 'on credit'. We pay cash. We save first.
> It is only a minority in Belgium, that buys consumer goods 'on credit'.
>
> The only things that are socially accepted as a reason to lend, are
> a house or a car. Anything else is considered 'reckless', even 'a
> shame'.
> I really would like to now, what would happen, if the 'American way
> of life' (or the Credit way of life) would seize to exist, and you
> would only buy goods if you had the cash, the way we do. What would
> happen?
> Let me guess...
>
>
>
>

Mar 29 06:47 PM

[jstratt:]

I dont buy all of Meredith Whitney's arguments on credit cards. She is very talented and called many things right in 2008.

I agree that credit card losses will occur. However the losses up to 15% will be fees and charges rather than loss of capital. Losses will sound bad because they already booked the profits.

The biggest loser is the post office which is losing 2 billion credit card applications being mailed.

The poor people who have been fleeced by credit card companies will be better off without credit cards. Unfortunately I think they will still be able to get them.

Loan sharks like real sharks are going to be amazing survivors.

Mar 31 08:00 PM