A Brilliant Article You Need to Read on Misguided Credit Card Lending

I just read an amazing article that everyone should read about the future and present of credit cards. If you have an interest in consumer debt issues you need to read “Credit Cards Are the Next Credit Crunch

While it is all brilliant, I think the following section is the most important.

There are several factors that are playing into this swift contraction in credit well beyond the scope of the current credit market disruption. First, the very foundation of credit-card lending over the past 15 years has been misguided. In order to facilitate national expansion and vast pools of consumer loans, lenders became overly reliant on FICO scores that have borne out to be simply unreliable. Further, the bulk of credit lines were extended during a time when unemployment averaged well below 6%. Overly optimistic underwriting standards made more borrowers appear creditworthy. As we return to more realistic underwriting standards, certain borrowers will no longer appear worth the risk, and therefore lines will continue to be pulled from those borrowers.

Second, home price depreciation has been a more reliable determinant of consumer behavior than FICO scores. Hence, lenders have reduced credit lines based upon “zip codes,” or where home price depreciation has been most acute. Such a strategy carries the obvious hazard of putting good customers in more vulnerable liquidity positions simply because they live in a higher risk zip code. With this, frequency of default is increased. In other words, as lines are pulled and borrowing capacity is reduced, paying borrowers are pushed into vulnerable financial positions along with nonpaying borrowers, and therefore a greater number of defaults in fact occur.

See also  Surviving With Less Credit

1 thought on “A Brilliant Article You Need to Read on Misguided Credit Card Lending”

  1. Very interesting article. It is definitely a time to prepare and re-plan. The article also speaks of many consumers reliance on the credit lines for liquidity and “just-in-case” money that is obviously not very reliable. The instant you need it, it’s gone! Get educated and have a backup plan!

    BillyBs last blog post..Credit Cards are next in the “Crunch”

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