Credit-card companies need to chill out, says analyst
Posted
Mar 13 2009, 12:05 PM
by
Kim Peterson
Rating:
American Express (AXP) and other credit-card companies have been closing accounts lately of customers they think could become unreliable in this economy. The companies want to reduce their risk of defaults, which are hitting all-time highs in the industry.
But credit lines are getting pulled too quickly, says noted financial analyst Meredith Whitney. That's going to hurt consumer confidence, spending and the overall economy in unexpected ways, she argues in The Wall Street Journal.
There's about $5 trillion in outstanding credit-card lines in the U.S. (with about $800 billion drawn upon), Whitney says. The way things are going, $2.7 trillion of that will be cut by the end of next year.
At first glance, that doesn't seem like a bad thing. People could spend more time saving and less time racking up credit-card debt. But Whitney outlines a few problems with this fast contraction:
1. Credit-card companies increasingly use a customer's zip code to determine whether to pull an account (since home price depreciation affects consumer behavior). But this reduces the borrowing capacity of good customers who happen to live in the wrong neighborhood. As their borrowing capacity dwindles, their potential to default increases.
2. The card companies are playing a game of "hot potato" to avoid being the last one extending an open credit line to a customer. That's because the last remaining credit card will get a lot of debt shifted on to it. Lenders need to work together to keep this negative spiral from taking place.
3. It's a fact that Americans use credit cards to help manage their money. Many keep credit cards around for emergencies or unexpected costs, and only a small portion of U.S. consumers have actually maxed out their cards, Whitney writes. Last year, just 17% of credit lines were drawn upon, though Whitney admits that figure is changing dramatically these days.
"If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably," Whitney writes. "With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively."
Politicians, regulators and banks need to show leadership and help derail this massive contraction in credit-card lines, she urges.
Image credit: Michiel1972, GNU free documentation license
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