Tuesday, December 02, 2008

Credit-Card Limit Reductions Coming

Folks following this economic saga diligently might remember my recent post regarding Citibank raising my card's APR. As a guy who uses plastic only for the convenience and cash back (no revolving debt here!), my only reaction to this rate-raise centers on how it'll affect a nation of Revolvers At Large.

In that post, I also mentioned:

High-FICO, convenience-only card users (like me) who can't imagine (not like me) their plasti-credit lines largely vanishing altogether in the midst of economic turmoil might do well to consider just that eventuality.

Which brings me to Meredith Whitney. She's an analyst (one of very few whose opinions I care about) who covers the financial sector for Oppenheimer, and she's now talking about declining plasticard limits, too:

The U.S. credit-card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said.

The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.

"In other words, we expect available consumer liquidity in the form of credit-card lines to decline by 45 percent."

Now, granted, cutting card limits by 45 percent (her estimate) isn't anywhere near the beachfront of my "largely vanishing altogether" admonition. Which, I suppose, heartens me.

Here's a nifty thought: How much of the oh-so-important American Consumer's spending power is reliant on ever-increasing credit-card limits? What does this mean for the economy?

And this: What happens to Joe and Jane Sixpack's FICO scores when their outstanding credit lines get sliced by even 25 or 30 percent?

Even if they're paying balances off every month, their FICO's gonna get tagged. We know that the debt utilization ratio (the amount of overall extended credit you're actually using, expressed as a percentage) is a big deal; it counts for a full 30 percent of your FICO tally.

So decreased credit lines mean debt utilization ratios go up. Which brings FICOs down on a widespread basis. Which makes banks and lenders nervous. Which makes them decrease credit lines. Which makes debt ratios go up. Which makes banks nervous...

Well, you probably see the path here. I believe the technical term is "vicious circle."

Here's how a forum commenter named "Weezie" summed it up:

Credit ratings also impact auto and home insurance, rental agreements, and new jobs. Have a person with pristine credit but a bit maxed on the cards? Now you get a domino effect: lines cut, ratio quality declines, FICO goes down, rates scream up, credit limits maxed (get extra fees), FICO goes down again, rates go up, prices for auto insurance and other agreements go up (if you're not dropped), new job prospects (that require a financial check) dry up.


So if you're a maxed-out family surviving only by the grace of Chase and Discover, well, I have a hunch that 2009 is going to be particularly memorable for you.

And not in a good way.

Yes, Virginia, deleveraging is a bi#%h.


— Posted by Michael @ 9:04 AM


This 'could' be potentially good for those of us who still have good credit. I always pay my bills on time, I never go over my limit, and am a good credit card customer.

This could eventually turn in people like mine's favor. If Discover has to refuse a large number of potential customers than they may have to start competing better to keep the good ones they have from seeking greener pastures.

ie. perhaps better rates, higher borrowing margins, ect. for low risk borrowers with good scores.

Time will tell, but I think this could be a safe assumption for the future!


@ PennySeeds - I don't see how you get that interpretation. I do all of the above you mention and I have a high percentage of available credit - which was granted to me based on the fact that I do all of the above.
If that line of credit is suddenly reduced up to 45%, then (despite the fact that I will still do all of the above) my FICO score will suffer because 30% of my score will suddenly show a higher usage rate (read: credit risk).
Plus, what motivation does a credit company have to give preferential rates when all of us high FICO score folks suddenly have lower FICO scores?


In late September, we moved from Texas to Oklahoma and until I read this article, I hadn't noticed that we have gotten ZERO credit card applications in the mail since our move. My husband and I had been getting at least 10 offers a week prior to our move. So already credit card companies are decreasing the number of offers they mail out. I'm SO glad.

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Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
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