U.S. Credit Card Companies Scale Down As Consumers Max Out On Their Debts

October 29, 2008 6:29 a.m. EST

Washington, D.C. (AHN) - An American consumer way of life may soon drastically change as an aftershock of the global credit crunch. Expected to be affected by tight lending environment are consumer credit cards.

Touted to be the next American crisis, the cutback would be the result of more credit card holders defaulting on their payments as home mortgage loans takes higher priority or as employees become jobless. For the first six months of 2008, banks had to write off from their books $21 billion in bad credit card loans resulting from more borrowers defaulting on payments.

Market analysts said as more U.S. companies lay off thousands of workers in the coming months, the credit card industry is expected to write off another $55 billion in bad debts. This would possibly surpass the 2001 experience during the technology bubble burst when total losses of the industry reached 7.9 percent of outstanding credit card debts. The current ratio is 5.5 percent.

Anticipating this problem, credit card companies like American Express, Bank of America and Citigroup have started to apply more stringent standards in approving new credit cards and struck off their list risky card holders. Capital One closed inactive accounts and reduced credit lines by 4.5 percent in the second quarter.

American Express announced it will increase effective interest rates from some card holders by 2 to 3 percent. The reward programs of other credit card firms have downgraded to lesser known brands.

Meanwhile, falling interest rates are not translated into smaller interest on credit cards because many banks have floor rates which have already been reached. Despite the absence of floor rates in some credit card companies and banks, these firms are slow in passing on the cut in interest rates, said Justin McHenry, research director of IndexCreditCards.com. He pointed out since August 2007, the Federal Reserve has reduced interest rates by 3.75 percentage points, but the average decrease in credit card interest rate was only 1.4 percentage points or 13.9 percent.

Even credit card junk mail offers are on the decline at its lowest level since 2004, while online credit card applications have gone down for the first time in five quarters.

Because American consumers are completely maxed out with mortgages, home equity dues and credit card debts, "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," Lisa Hroneck, research analyst of Mintel, explained to the New York Times.