What's Next for Credit Card Companies?

The Wave has Broken

For banks that rode the credit card wave to riches on the backs of sub-prime borrowers, it is time to find another revenue source. It appears that the consumer may be tapped out.

Consumer sentiment as measured by the Reuters/University of Michigan index fell sharply in early May, to 59.5 from April's final reading of 62.6.

This poll (1) surprised analysts who expected only a .1 percent in drop from April. The stimulus checks, which were intended to "jump-start" the economy have gone or will to to one of three sources:

1. Gas Stations
2. Service Credit Card Debt or
3. Service Mortgage debt.

Regardless of amounts, stimulus checks have not had a positive influence on consumer sentiment.

According to Dean Calbreath in San Diego.

On average, Americans owe $2,342 per person on their credit cards alone, according to TransUnion, a Chicago-based credit tracking firm. Credit card usage has been climbing since the housing market went south, since homeowners can no longer use their equity to finance major purchases. (2)

Some savvy collection agencies have used more aggressive techniques to claim portions of stimulus checks before they are spent. (3) At one time, increased use of credit cards would have been a bullish sign for companies. However, banks are now scrambling to limit exposure to "bad" borrowers.

Ye of Little Faith

Banks are increasingly unwilling to extend "risky" credit due to an increased recessionary sentiment. This is part of the reason banks have backed away from the student loan business. According to the Fed's Loan Officer Opinion Survey from April " On net, about 25 percent of domestic banks—up from around 15 percent in the January survey—expressed a diminished willingness relative to three months earlier to make consumer installment loans. About 45 percent of domestic banks—up from around 30 percent in the January survey—reported tightening lending standards on consumer loans other than credit card loans. " (4) While the Fed has gone to great lengths to increase liquidity, it appears bank have little faith in that liquidity to the consumer.

The Good News

These figures suggest that banks will be fighting for customers who are a good credit risk (700 or above credit score), as opposed to those who fall into the sub-prime category. As banks continue to play a shell game with the best customers, consumers who have good credit may be the winners in the end. A survey of www.creditmall.org suggests that every bank wants a consumer who is deemed as a good risk. All credit card underwriters are after customers with the best credit score. Good credit scores are rewarded better now, than almost any other time in history.

Here are some of the following offers banks have extended to consumers with excellent credit:

1. Credit cards from 6 to 15 months with 0% APR
2. Credit Cards with no annual fees and special offers.
3. Credit Cards with lowest APR on balance transfers.
4. Credit Cards that save on gas purchases.

Here are the offers banks are "giving" to consumers with poor credit:

1. Prepaid Credit Cards.
2. Credit Cards for those who have poor credit. (Be sure to read the fine print.)
3. Secured Credit Cards.
4. Student Credit Cards. (Be sure to read the fine print.)

In conclusion, credit card companies are in a mad scramble. Companies are tightening lending standards to those who have questionable credit histories. There is a growing gap between the types of credit card offers that are available for those who are deemed as a good risk as opposed to those who are in the "sub-prime" categories. There had never been a better time to be a consumer with excellent credit. It is about time that those who have the best credit are rewarded.

Implications for the Credit Card Industry: A Wipe Out?

Visa (V), MasterCard (MA), Discover (DFS), and to a lesser extent American Express (AXP) will see less people applying for plastic in the United States. While V and MA offer the services end of a card, tighter standards from banks will make it more difficult for consumers to get plastic. This will influence the N. American business operations. Also, the United States is the most profitable market as well. Banks that have a substantial exposure to credit cards may have problems as well. Bank of America (BAC), J.P. Morgan Chase (JPM), Citi (C), American Express (AXP), and Capital One (COF) must refine business models and evaluate the criteria of a good customer in light of new recessionary type data. Like other banks HBC has hedged its bet by asking "at-risk" borrowers to pay a one time acceptance fee. This organization also enters cardholders into a lottery type drawing...(5) While National City Bank's (NCC) credit card business is limited, there is good reason to believe that it's bottom line will not be helped by this division of business.

Sources Cited

1. "US early May Reuters/Michigan consumer sentiment falls to 59.5 vs 62.5 expected"
2. "As stimulus checks arrive, so do higher food, gas costs"
3. "Stimulus Payments Trigger Debt Settlements"
4. Federal Reserve, "Senior Loan Officer Opinion Survey on Bank Lending Practices"
5. "The worst credit card deals in America"

Sources Referenced

1. Consumer Credit Counseling Services
2. "Buffett sees "long, deep" U.S. recession"

Comments

[nickononame]

With credit comes responsibility. I personally do not know anyone who has bought a $400,000+ home on a family income of $60,000 or less..... Those that fudged their numbers and the banks that knew this going into a loan... opps.... lesson hopefully learned. This percentage of the above statement only accounts for 5% of the population...... is it really that bad? I do not see people not driving, or buying higher priced items, sure discressionary spending may go down a little with various income brackets but I do not believe it will be the whole world as the media bling/blings it up to be....

Sure that 5% is making everyone else suffer in investments...As a comsumer, I do not see all the negative issues the media is pounding into our heads.. Pound enough,,and people begin to believe. Sure gas is high and may be going higher. I'm sure we spend more on other things than just gas which have gone up some as well. Again, added up, this only lives up to the media in certain income brackets. If you make less that $60k on a combined family income, and are living in a $400k+ home and driving a Hummer to run errands around town, to buy food and put more gas into this guzzler: if everyone did this and was in this bracket, we would certainly be in trouble. As a consumer, I have stopped carrying around cash and use Visa everywhere I go. It truly is the card that pays you back. I pay off my balance every month, as a religion. I do not charge more than I can afford to payoff. Easier said than done,; maybe....but make that change if need be.... or become burried with the 5% out there.