Expect Tidal Wave Of Limit Reductions and Credit Card Closures to Hit Before Christmas

Posted by Steve Rhode

November 3, 2008

Yesterday I wrote about a little old hardware store that had noticed an increase in card purchases over cash. That’s not a good sign if people are using plastic more for routine things and especially in this environment of credit card issuers reducing credit limits, raising interest rates and closing cards.

You see, the credit card issuers are getting freaked out that more people are going to start using the cards when they can’t afford it. Shocking! I guess that’s okay when you can limp along and make the monthly minimum payments but otherwise it is a bad thing.

The credit card message has been “use the card, use the card, use the card” but that pendulum is swinging to “don’t use the card, don’t use the card, we’ll take that card”.

Apparently this trend is not limited to just the United States or just hardware stores. A story in India noted:

Usage of plastic money is increasing with times but at the same times it is also increasing the worries of credit card companies. In September 2008, the transactions done through credit cards went up by nearly 20% against the previous month. Normally this would be a reason to cheer for the card companies but presently it has become a cause of concern.

The credit card companies are worrying because they think that rising usage of credit card may also result in higher number of defaults among these users.

If all of this is true, which it is, retailers are going to be hating life this holiday season as credit card issuers start closing cards to avoid even higher losses. Without available cash or loose credit, consumers won’t be able to go overboard on holiday spending.

I’m thinking we need a joust between banks and retailers. Wouldn’t that be fun to watch?

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Comments

Comment by David on November 3, 2008 @ 1:45 pm

Laws are stacked against the consumer, and we’re heading into a “perfect storm” as far as the credit card outfits are concerned. The bad economy means more people will be charging more, meaning more interest income; as people hit their limits, over-limit and late fees will compound; credit card vendors will LOWER limits to help facilitate that; bankruptcy laws (in US, anyway) make it harder to discharge credit card debts; in using their cards, most people have waived their rights to go to court over any disputes, and the Binding Mandatory Arbitration guys rule 98% in favor of the card vendors.

I’m sure credit card outfits are just GIDDY at the prospect of the surge in revenues they’re expecting over the next 6-12 months!

And I’d bet my bottom dollar that every single one of them will be raising over-limit and late fees before Christmas … just before they notify people they’ve cut their credit limit to about 10% above their current charge amount.

Comment by Marcus on November 3, 2008 @ 10:07 pm

I wrote a column last month discussing my family’s plan for the holiday season. Even though we carry no credit card debt — and have not suffered any kind of adverse action from our credit card companies — we are having a lean Christmas (by design). We’re not spending much money. We’re in a recession. This is a time to save. It’s not a time to spend.

The sooner that consumers get the message that this is a good time to shore up their balance sheets at home, the better off they’ll be. They should be de-leveraging — not increasing debt. Maybe they didn’t get the memo.

At my blog, I teach this: pay in full, pay in full, pay in full. If you don’t have money sitting in the bank to back those credit card purchases, don’t use the card. Most consumers don’t pay off their holiday purchases until well into March. The card companies just love this time of season.

That said, and to address the point of this story, I think that credit-limit decreases are going to hurt consumers in another way. Because I know consumers won’t be able to refrain from going into debt, their utilization will be going higher. The credit-limit decreases will merely compound this problem.

The hangover from this holiday season should be a doozy.

Marcuss last blog post..Loss In Confidence In Banks Causes Huge Shifts In Deposits

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