Credit card crackdown: We know who you owe

The New York Times tonight weighs in on the next credit squeeze consumers will feel -- what the paper calls "the credit card crisis:"

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.

Here's the paragraph that caught my eye:

Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.

That's kind of scary. Guilt by geography. Redlining, I believe it's called. You have perfect credit, manage your finances responsibly, and the credit card company dings you because you live in a neighborhood where people are behind on their mortgages? One more from the story:

Even those with good credit ratings are not excepted. American Express, which traditionally catered to more upscale cardholders, said it would be increasing effective interest rates by 2 or 3 percentage points for some of its credit card holders — a move that could, for example, push a 15 percent rate up to 18 percent.

Would love to hear your thoughts on this one.

--Peter Viles

Photo Credit: Getty Images

Comments

[brettdl]

Credit cards are the worst of the worst scams and you just posted most of the reasons why. I only use them by keeping zero debt on them and by being careful to never be late on a payment. I wouldn't even do that if they weren't so convenient. (That, and I hate walking around with wads of cash.)

[Uncle Billy Is Shocked]

brett, let me introduce you to the wonders of the "atm" card.

[syscom3]

The credit card companies need a good smackdown by Congress.

People with good credit should not be hit by redlining and other absurdities.

[Tom Lindmark]

Get used to the higher rates. It's called pricing risk appropriately.

[upthecreek]

It's About Time.

Long time in the making. Maybe Congress can bail these people out also.

I love paying higher taxes.

[Laker]

Funny, but just half hour ago, i open my mail and found a letter from WaMu, or should i say JP Morgan Chase. They notify me that they slash my credit limit down to $46,160 from $75,000. I had this card for about 11 months now and i use it for many every day charges. My limit was first $55,000 and was increased to $75,000 2 months after.
Now, my balance was $45,953 on the day they reduced my limit was stated was October 17th. Today is October 27 and i get the mailing...I feel lucky that i did not charge $200 in the last 10 days...or i would have bit hit with a spank of $39 over the limit fee...While i was under the terms of having $75K limit.
So the bastards reduced my limit after the fact 10 days retroactively.
For those that wonder, this is a 0% APR card...it also rebates me 1% back in point for gift cards)
On the notice they state some bogus reason to justify slashing my limit on this card...like paying only minimum...
Why would i pay more, if i have 0% apr for 18 months...and can keep my cash earning 5% in a CD while shopping for my needs, paying bills, etc.
btw, as of today, my FICO is 796. Now, because of them slashing my limit to basically my balance, my usage on the card will get to 99% and my FICO will crash...
Yeah...FED. Why don't you give JP Morgan more cash to hoard..they will never lend this money to people...they are doing the opposite and on Prime holders. What happens then to sub prime???

[Tim]

Just got a notice from AMEX that my credit limit was being reduced 4K. I pay my bills, never been late, but I just bought a house... perhaps that is it... or maybe I gave money to the wrong candidate...

[Mark_Pasadena]

DON'T BUY STUFF YOU CAN'T AFFORD. Never carry a balance on a credit card, always pay in full every month. If you can't pay in full, then you can't afford it!!

They're just pricing the risk appropriately to the person charging things that they can't afford. If they don't like it, they can stop using these marvelously convenient forms of payment.

For the last 2 years I've received $500-$600 CASH BACK from my American Express Blue Cash card. I've paid in full. It's extremely convenient to use a credit card instead of cash...and they PAY ME TO USE IT!!! What more can I ask for?

All you crybabies need to learn to STOP BUYING THINGS YOU CAN'T AFFORD.... here's a Saturday Night Live Clip to teach you this simple lesson most of you can't learn:

http://tinyurl.com/37gth4

[E]

Get ready for the "WHAT DID THEY DO TO MY HELOC?!?!" crowd to come in here and whine about their credit card limits being chopped.

[srla]

Judging from the number of robocalls I am currently receiving from collection agencies seeking people with my last name (the curse of a common surname, I guess), the banks are getting increasingly desperate to collect on delinquent accounts.

But redlining seems to be going over the line. It's always amazing to what lengths the banks will go to seduce consumers into increasing credit card debt during good times, only to watch them resort to all sorts of shady means to collect on the inevitable delinquencies that arise from those practices down the line.

It would make more sense to take a more pragmatic and balanced approach, limiting the balances only of those with marginal credit scores. Instead, banks, like other financial sectors, appear to be recoiling in fear, and fear leads to irrational behavior.

[Cal]

The fact that retailers are bringing back layaway (some, it never left) kind of speaks to credit conditions all by themselves.

It was a credit bubble that caused a housing bubble. Those people who learned to live beyond their means will learn a whole new way of living and they won't like it very much.

[kathryn]

I think the credit card companies are preparing for a good smack down by Congress, that's why their reducing their exposure. Assuming the Democrats are in charge of Washington, there could be all sorts of new regulations and restrictions coming. They're smart to cut back while they can. Who knows what the Democrats are going to do, but it's not going to be good for the banks.

And I'm guessing it's not so much redlining, as taking property values into into account. No matter what your credit score is, if you own a home in an area that has been hit by massive foreclosures like say Palmdale, you've taken a major hit. Why wouldn't credit card companies want to reduce your line of credit? If you've lost all the equity in your home, there's no HELOC to fall back on.

Personally, I'm glad banks are acting responsibly. It'd rather see them cutting back than another round of the same irresponsible lending that caused this mess to begin with. Americans need live within their means.

BTW, Motley Fool has a good article about the looming credit card crisis. http://www.fool.com/investing/dividends-income/
2008/10/28/a-rising-trend-that-could-hurt-banks.aspx

[Casey Le]

On a more personal note, I got a $15,000 check and I used it to pay off completely all of my credit card debt. 3 of my credit companies then cut my rates from around $7,000 to $10,000 down to $500.

My credit score is respectable, I have a stable job, and live in Dallas. I don't understand it.

It's simply kicking people while they are down in my opinion.

[356man]

"brett, let me introduce you to the wonders of the "atm"card"
Uncle Billy, if it is a debit card, let me introduce you to the wonders of identity theft and the fact that your entire account balance can be looted and it is up to you to prove you are innocent. This was from a card that was only used to make transactions at the local WaMu ATM, not for any purchases, and I still got hit. A credit card limits your potential liability to $50. I agree with the blog (including Cal!) that credit cards must be used judiciously; I just wish life events like auto repairs would cooperate.

[dclogang]

Mark! I've been looking for that SNL skit!!! Thanks for posting that! "I buy something I want and hope I can pay for it." This is the one line that says it all about the Mortgage meltdown. If they had just watched this skit this mess would have been avoided. haha.

They should show that skit in high school (maybe even elementary) and college.

My wife and I do the same thing.. almost everything on credit card and pay it off. We never get charged interest and we get cash back rewards. I'm sure the CC company hates us.

My wife and I have FICO of 810 each too which isn't too bad. How the heck does one get 850? It's a silly goal of mine. I think it's because we don't have a mortgage (no seriously!)

The next few months are going to get real interesting....

[Doug in Toronto]

Funny how "reducing risk exposure" leads to higher interest rates for many cardholders. This inevitably leads to yet another case of those who manage their finances prudently being dinged with the cost of carrying the deadbeats. Or more correctly in this case, I'm paying the profits the credit card company isn't making from you.

[tew]

The Democrats are going to pass a number of restrictions on credit card companies. Some of these restrictions will eliminate real abuses around bogus fees and such. Other restrictions will have two effects:
1) Reducing the number of credit cards available to many people as well as the amount of credit
2) Redistributing the cost

How will this happen?
Regarding (1): Congress will reduce the profitability of the industry and thus the industry will have to be more careful.
Regarding (2): Congress will make it difficult for credit card companies to segment (as described in this post) and to aggressively go after deadbeats. The industry will need to "spread" the costs of bad accounts to good accounts even more than is done currently.

[Gene J]

Wanted to trade my AMEX Green card for something which is fee free. They had me apply for a Blue.

I got it but it has a real lousy credit limit for my income and very high rates for a 790 FICO. I never carry a balance but this is just sad.

[MalibuRenter]

"Instead, banks, like other financial sectors, appear to be recoiling in fear, and fear leads to irrational behavior"

That's what appears to be happening. However, there are some other possibilities. It could also be that the bank is having trouble rolling its commercial paper that they used to fund credit cards, or that their interbank borrowing is more expensive.

By the way, I've been getting unsolicited increases in my credit limits and offers to borrow money at zero percent teaser rates. Why? The bank probably checked my bank balance with them and noticed it's much more than the limit on my credit card.

[MyLessThanPrimeBeef]

I had a nightmare.

Boys and girls, that's you and me, were given loads of credit cards by credit-score-blind banks.

We then proceeded to max out our cards contributing to pro-bailout candidates before 'mailing' the cards back to the issuers.

What monsters we were.

What a nightmare!

[Alice B. Toklas]

You're damned if you do...and you're damned if you don't!

I have four credit cards with ZERO balances. I rarely use cards, except for online purchases. I pay them off in 30 days. But, if you DON"T use the cards on a regular basis, your FICO score goes DOWN! We are actually penalized for NOT using our cards!!!

Debt is money; and the US economy will tank if we aren't up to our ears in debt! We are being forced to build up debt! Is it any great surprise that there is so much BAD DEBT when credit cards are issued to millions of deadbeats???Something is terribly wrong here!

[TakeFive]

Something's going on. I'm was getting 3-4 credit card offers a week, now down to about 2-3 per month.

Strangely though, the two cards I carry each have both RAISED my limits 3 times this year without me requesting it. Don't know why. My financial situtation has not changed to any significant degree.

But those limits Laker has? That's crazy. I got hit for $8K in Vegas last xmas by someone who stole my cards.

Even scarier - a $46K balance. Is that a zero intest rate?

[Big Fella]

Not surprising at all, given that Congress and the administration have done their best to gut banking regulations, minimize regulation, and legalize usury on behalf of the deep pocket business interests that pull their strings. Card holders can thank that likes of Phil Gramm and many of the "old boys" in Congress for facilitating the greedy card companies.

[Nelcisco]

So, as the unemployment rate continues to rise & people become more and more strapped for cash, credit is exactly
what they'll need just to buy the essentials and if its not available well... go figure, simple math, their credit card income will no longer be there so they'll have to find a way to make close to 6 figues and how likely is that?

[TakeFive]

Also...

One of the explanations I commonly heard for doing a ReFi was to pay off credit cards, many of which promptly got charged back up.

Move unsecured debt you can't pay, to secured debt you still can't pay. What a great plan.