Credit Card Industry to Cut $2 Trillion Worth of Credit Lines?
According to a recent report from prominent banking analyst Meredith Whitney, the U.S. credit card industry is poised to cut $2 trillion worth of credit lines over the next 18 months due to risk aversion and regulatory changes. This represents a 45% decrease in consumer credit lines, which could have a dramatic impact on consumer spending.
According to Whitney, the credit market will be 18 months behind the mortgage market and will begin to shrink by mid-2010, but… In case you haven’t been paying attention, a number of issuers have already started down this path by reducing credit lines and closing dormant accounts.
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i don’t think it will have a dramatic affect on spending. those who do not carry balances will not be affected, and if they were, they will continue to not carry balances so it doesn’t matter. those who carried balances were more than likely maxed out or near maxed out and the margin between available credit after making a month’s minimum or over minimum payment, but still carrying balance isn’t large. those who did carry balances but weren’t maxing out limits, will still not be maxing out limits. if people haven’t used their cards in 12-24 months, closing them won’t affect spending either. i think much ado about nothing is being made plastering $2trillion reduction on the headlines. there will be a small decrease in spending, but nothing near 45% reduction of limits, let alone $2trillion reduction. i’m also not sure how you can determine whether reduction in spending is due to reduction in credit lines or just a function of people cutting back because of the crappy economy.
Comment by Tim — Dec 2nd 2008 @ 7:08 pmthe total credit lines extended to many customers are so high that cutting them in half would have little effect on their spending. That’s certainly true in my case.
What cutting those lines would do is reduce the cc co’s outstanding lines and firm up their balance sheet, which is a necessary thing for them. It seems like a no brainer for the cc cos to do that-makes perfect sense to me.
It could have a negative effect on customer’s credit scores if the customers are carrying significant balances, such as large balance transfers, on their cards and are unable to pay them off immediately, however.
Comment by steve — Dec 5th 2008 @ 1:25 amif they are carrying significant balances, there is a high probability it doesn’t matter that their credit score is decreased. i think the new rule is 10% or less credit utilization.
Comment by Tim — Dec 5th 2008 @ 4:22 pmReally? 10% credit utilization? Could you tell me more about that and when their guideline changed?
Comment by steve — Dec 5th 2008 @ 7:25 pm