Credit Card Clampdown

If the extension of credit has been the driving force behind financial growth in the United States, then another revenue stream should be sought. It is safe to say, that credit card growth will not be a viable option.

According to recent statistics released by the Federal Reserve, revolving debt rose to a staggering level of $969 billion dollars. Non-revolving debt continued to increase to $1.617 trillion dollars. (1) While these numbers demonstrate an up-tick from the previous month, it should be noted that spending increased while unemployment increased as well. August unemployment rose to the national average of 6.1%. (2) With the financial fallout of Lehman (LEH), AIG (AIG), Merrill Lynch (MER), and Bank of American (BAC) still to be felt, we can expect a healthy rise of unemployment claims for the foreseeable future. Of course, there will be additional claims due to the displacement of workers from Hurricane Ike as well.

Discussion

Bank credit card divisions are scrambling to win over the best customers. Companies like Bank of America, Capital One (COF), JP Morgan (JPM), and Discover (DFS) are rolling out some wonderful teaser offers to woo the best customers. However, this growth at best is limited as banks are simply competing for a limited pool of consumers. Many more who need credit cards will not qualify. This problem may lead some financial institutions to re-evaluate lending standards to profit. Again, creative financing is a slippery slope that all should avoid.

Implications

With a perfect storm scenario still in place, many analysts believe a financial meltdown of some type is imminent. Credit card issuers have tightened underwriting standards. While there has never been a better time for the responsible to apply for a credit card, those with negative marks, or even sub-prime credit are in trouble. More importantly, the banks that once feasted on the risky credit card user are now being shut out of most offers. For instance, www.creditmall.org states that the credit card approval rate is 10:1. While the best will receive credit, others will not. As for financial institutions, banks will need to search for another growth engine, as this one is defunct. Financial panics do not in themselves lose capital, rather they simply inform lenders as to how much has already been lost.

1. http://www.federalreserve.gov/releases/G19/Current/
2. http://www.bls.gov/news.release/empsit.nr0.html
3. http://creditmall.org/

Stock position: None.

Comments

[fatcat:]

My card companies are working me hard,with offers coming everyday thru Email....and I'm already their customer.COF is also offering high yield savings schemes..

2008 Sep 17 09:09 AM

[valuestocks...:]

It is about time they are monitoring their clients credit worthiness. Debt is a four letter word.

2008 Sep 17 09:18 AM

[neeb??:]

Just say No.

2008 Sep 19 08:59 PM