Friday, June 20, 2008

Credit Card limits get cut


June 21, 2008
Banks Trimming Limits for Many on Credit Cards

The easy money that led Americans to depend on credit cards to pay their bills is starting to dry up.

After fostering the explosive growth of consumer debt in recent years, financial companies are reducing the credit limits on cards held by millions of Americans, often without warning.

Banks that issue cards like Visa and MasterCard, as well as the American Express Company, are cutting the limits for customers who have run up big debts, live in areas that have been hit hard by the housing crisis or work for themselves in troubled industries.

The reductions come as American consumers, squeezed by a slack economy, a weak housing market and rising unemployment, are falling behind on monthly credit card payments in growing numbers. Credit card lenders are also culling their accounts ahead of new rules that are intended to benefit consumers but could limit the profits on customers deemed bigger risks.

Many Americans have come to rely on credit cards to cover everyday expenses like groceries, gasoline and medical bills, in addition to big-ticket items and luxuries.

While consumer spending, the nation’s economic engine, has been surprisingly resilient of late, a more sweeping reduction in credit card limits could pose serious challenges for hard-pressed consumers and, in turn, the broader economy.

Many are already feeling pinched. Pamela Pfitzer, a family therapist with a stable six-figure income, was stunned when she went to a garden center near her home outside Sacramento in early April and tried buying about $30 worth of flowers with her American Express card. Her transaction was denied, she says, even though she had just made a $1,000 payment and almost never missed one in her life.

It turned out that shortly after falling behind on a mortgage payment and being hit with a tax lien, American Express had lowered her credit limit to $900 from $2,300. The flowers pushed her over the new cap.

Then last month it happened again, she says, when she tried to buy office furniture with her Wells Fargo Visa card. Although she had just made a payment of about $700, Ms. Pfitzer found out that her credit limit had been lowered to $2,000 from $2,800.

“In all the years I have had credit cards, I have never had this happen before,” Ms. Pfitzer said. “Now it has happened twice in the last few months.”

Banks and mortgage companies are required by law to notify customers within three days of changing the limits on a home equity line of credit, and many have been aggressively lowering them. But credit card lenders have 30 days to notify their customers, and often do so only after taking action.

Such moves can cause a consumer’s credit score to drop, forcing the person to pay higher interest rates and making it harder to obtain new loans.

Even so, disclaimers in the fine print of credit card applications typically stipulate that the issuer can cancel or alter credit limits at any time, regardless of customers’ payment or credit history.

Washington Mutual cut back the total credit lines available to its cardholders by nearly 10 percent in the first quarter of the year, according to an analysis of bank regulatory data. HSBC Holdings, Target and Wells Fargo each trimmed their credit card lines by about 3 percent.

Among those four lenders, that amounts to a reduction of about $15 billion in three months. Over all, the amount of available credit for the industry appears to be about flat, with the three biggest issuers — Bank of America, JPMorgan Chase and Citigroup — slightly increasing their overall credit lines. But even they are trying to rein in risky individual accounts.

Big banks face intense pressure on their balance sheets as they bring on billions of dollars worth of complex mortgage-related investments and other loans they are struggling to sell. Meanwhile, they are bracing for a surge in credit card losses as the job market and economy get worse.

Consumers are reaching deeper into their pockets to pay for groceries and gas. Last year, as many as half of all those who took out home equity loans used the money to help pay down their credit card debt, according to J.D. Power research. But home equity is no longer an easy source of financing. And month after month, cardholders keep falling behind on their bills.

“This downturn is the perfect storm where the consumer is getting squeezed from all levels,” said Michael Taiano, a credit card industry analyst at Sandler O’Neill. He projects that credit card loss rates for lenders, now around 5.7 percent, could go as high as 10 percent in next 18 months. That would be higher than the peak levels

reached after the 2001 technology bust.

Since borrowers typically run up their balances before they stop paying, issuers have started cutting lines of credit. Often, lenders will lower customers’ credit limits as they pay down their debt — a technique known in the industry as “chasing the balance.” This way, they are on the hook for less money if borrowers default.

“They are trying to cut their risk exposure,” said Bill Ryan, an analyst at Portales Partners. “The consumer that used to use his house as an A.T.M. is now starting to use their credit card as an A.T.M.”

American Express is reducing credit lines for customers holding subprime mortgages and small business customers in industries tied to the real estate market. And Chase Card Services, the consumer arm of JPMorgan, is taking similar action on distressed borrowers, especially in places like California, Arizona and Florida where home prices have declined sharply. Washington Mutual, HSBC, Target, and Wells Fargo all acknowledged they were pulling in lines of credit as part of broader strategy of reducing risk.

None of the lenders, as a matter of policy, would comment on individual customer accounts.

Cardholders in places like Orange County, Calif.; Las Vegas; and Phoenix have noticed their credit lines shriveling up.

John D. Craig Jr., a college administrator from outside Buffalo, said he had regularly been paying own his balance on a rarely used card when Chase informed him they were reducing his credit limit to $4,000 from $20,000. The news took him by surprise.

“For two or three years, it was, ‘We are going to give you more credit, more credit more credit,’ ” he said. “Now, in the last two or three months, it has been the exact opposite.”

Those who work in real estate-related fields say they are being pinched by the credit card lenders at a time when they most need to have money available. .

In Seattle, Phillip Rodocker, a sales associate for a large residential real estate firm, said that the credit limit on his Citi Visa platinum credit card had been reduced in April to $4,800 from $8,000 even though he says he never missed a payment and had no recent credit blemishes.

Leslie Sherman, the owner of Realty Executives in Las Vegas, said American Express reduced the credit limits on several personal and business cards virtually at the same time.

“It has definitely made me spend less,” she said. But Ms. Sherman said that it had been a blow to her ego, too.

“It made me feel like I wasn’t responsible. I know when to put my reins on and when not to,” she added. “I didn’t appreciate someone thanking me for always paying my bills on time and being a good customer by dinging my credit.”

Meredith Whitney, an Oppenheimer banking analyst, said the impact of the recent regulatory proposals on lender profits could be so severe that she expects the industry to pull back $2 trillion in outstanding credit lines by 2010. That would be a 45 percent reduction in credit currently available to consumers. Risky borrowers would be squeezed the most.

Customers with stronger credit histories have probably noticed few changes. But card issuers are also becoming pickier about whom they approve. In April, nearly 30 percent of senior loan officers said they were tightening their credit card lending standards this winter, according to a Federal Reserve survey. That was about three times as many who said they did so in the fall.

Lenders are also sending fewer offers in the mail. The volume of direct mail promoting credit cards fell nearly 19 percent since last October, to about 900 million pieces, according to Mintel Comperemedia, a marketing research company.

And borrowers already in debt, once courted by card companies, are being shunned.

Zero-balance teaser rate offers have fallen by about 15 percent over the last year, according to Mintel.

Consumer Debt on the lower end of the FICO scores is the next shoe to fall in the world of Wall Street finance. Securitized products of Auto loans, Car loans, HELOCs (your mortgage as your ATM) will all suffer. This will lead to further losses in Financials at a time when home prices are STILL falling. Credit availability will become scarce leading to a significant retrenchment in living standards for significant numbers of Americans. I expect debt collection businesses on the consumer level and corporate bunkruptcy specialists will be very busy in the next 2 years. The collateral damage will ripple through even high end "Nordstrom consumers" as well although I suspect the ultra luxury "Hermes consumers" will do just fine in a rising inflation environment. Somehow those people always seem to make money