Credit Card Crisis

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After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.

The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.

Lenders wrote off an estimated $ 21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments.

While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action.

The regulations, while beneficial to consumers, will curb profits on card issuers' riskiest customers. And lenders, over all, are slowing the flood of mail offers to a trickle with moves that would translate for the average American household into about 13 fewer pieces of credit card junk mail a year than its peak in 2005.

Online credit card applications have fallen for the first time in five quarters, in part because customers are receiving fewer mail offers that drive them to the Web.

Credit card issuers have realized their market is shrinking and that there is no room for extra credit cards, so they have to scale back. People are completely maxed out with mortgages, home equity lines and credit card debt.

At the same time, credit card profit margins have been narrowing, largely because lenders' own financing costs remain elevated as investors spurn credit card bonds, just as they did mortgages. Another factor is that the interest rates banks charge even creditworthy borrowers have come down after the emergency actions taken by the Federal Reserve to ease the credit crisis.

In previous downturns, banks could make up the missing profits by raising fees. This time, there may be less room to maneuver.

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Source by Amy Alice