Credit Card Crunch

Seems like when it rains it pours. The latest lending sector to get caught up in all the bad news, at least for consumers, is the credit card industry. To protect their profitability, credit card issuers will be lowering credit card lending limits, tightening up their lending standards, and increasing those wonderful (yes, this is sarcasm) late fees we, the credit card carrying masses, so love to pay.

Part of the reason that issuers are implementing these new rules/standards has to do with the bad practices these issuers were oh so happy to follow when times were good. As a country, we were enjoying credit we shouldn’t have been enjoying, at least some of us anyway. Lenders were being lax with credit in all areas, the obvious one being housing, but that translated into lax regulations and standards on the credit card issuers as well.

Citing the (what seems inevitable) recession that’s here or coming, UBS last week recommended selling the stocks of three of the largest credit card issuers on the block: American Express, Capital One Financial (apparently a negative balance is what’s in your wallet these days), and Discover Financial.

Decent FICO scores are partially to blame, which is leading the way for another trip under the microscope to see if the credit scores being used don’t need updating to reflect the reality in the credit business these days.

In recent times, individuals and families have used their credit cards at debit cards, buying groceries, gas, and any other household expenses they deemed necessary. Things have changed. Credit card issuers are dropping limits and charging higher rates for the privilige of using that credit. The mortgage debacle that began last summer has finally reached the credit card industry, putting that much more pressure on borrowers.

Profits at large card divisions are dwindling, and someone has to pay for it. Credit card costs at Chase alone are just shy of $2 Billion. Loan losses at AMEX are $1.5 Billion, a 70% rise.

The problem for consumers is that the credit card issuers are not clear on when the bottom will hit, and that means they’re going to be preparing for the worst. That means you’re going to be paying more for your credit. Unfortunately, for some, that means cracking the retirement piggy bank to find ways to pay for current needs. Obviously, not the ideal situation, but one that’s quickly becoming a reality for many.

For more information, check out the RGE Monitor.