Even credit card companies are tightening up …

Excerpted from WSJ, “Credit Cards Are the Next Credit Crunch”, Whitney, March 10, 2009

Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon.

(That compares to total mortgage debt of over $10.5 trillion)

I believe that there will be at least a 57% contraction in credit-card lines. Of the $5 trillion, over $2 trillion of credit-card lines is likely to be cut in 2009, and $2.7 trillion by the end of 2010.

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.

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.

Currently five lenders dominate two thirds of the market. Credit-card lenders are currently playing a game of “hot potato,” in which no one wants to be the last one holding an open credit-card line to an individual or business. While a mortgage loan is largely a “monogamous” relationship between borrower and lender, an individual has multiple relationships with credit-card providers. Thus, as lines are cut, risk exposure increases to the remaining lender with the biggest line outstanding.

* * * * *

Over the past 20 years, Americans have also grown to use their credit card as a cash-flow management tool.

For example, 90% of credit-card users revolve a balance (i.e., don’t pay it off in full) at least once a year, and over 45% of credit-card users revolve every month.

A relatively small portion of U.S. consumers have actually maxed out their credit cards, and most currently have ample room to spare on their unused credit lines. For example, the industry credit line utilization rate (or percentage of total credit lines outstanding drawn upon) was just 17% at the end of 2008.

Full article:
http://online.wsj.com/article/SB123664459331878113.html

* * * * *

Want more from the Homa Files?
Click link =>
  The Homa Files Blog

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s