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Credit Line Cuts Could Boomerang [big banks shooting themselves in the foot]
American Banker ^ | 2008-12-29 | Maria Aspan

Posted on 12/29/2008 2:26:43 PM PST by rabscuttle385

Credit line reductions, account repricing, and other steps that card issuers are taking to control risk could soon start causing their customers to do something many homeowners did this year: walk away from their obligations.

In the past month current and former industry executives and observers have raised concerns that prevalent risk management tactics may spur such behavior — even among customers who still have the capacity to pay.

For example, some observers said aggressive repricing could lead to a spike in "bust-outs" — when cardholders decide to run up as large a balance as possible before abandoning the account. In the past, bust-outs have typically been perpetrated by fraudsters who always planned to default, but they may soon become more common among regular consumers who obtained their cards in earnest, these observers said.

One way to prevent this from happening is by reducing credit limits, but that also can have unintended consequences.

"The question always happens, and it happened in the crisis of '92, '93 … if you're having to reduce people's credit lines, does that give them more incentive to pay, or less?" said James L. Bailey, a former Citigroup Inc. executive who ran its North American consumer banking and credit card business in the 1980s and '90s. Cardholders whose credit limits are cut down to their existing balances may decide that their card bill is no longer a priority for payment, "because that card has no utility for me anymore," said Mr. Bailey, who is retired.

When compared to home or car loans, or to other household expenses, a card with no purchasing power ranks especially low in a consumer's "payment hierarchy," he said.

(Excerpt) Read more at americanbanker.com ...


TOPICS: Business/Economy; News/Current Events
KEYWORDS: amex; bank; banking; bankofamerica; banks; capitalone; citi; creditcards; discover; economy; financialcrisis; panicof2008

1 posted on 12/29/2008 2:26:44 PM PST by rabscuttle385
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To: PAR35; TigerLikesRooster; bamahead; AndyJackson; Thane_Banquo; nicksaunt; MadLibDisease; ...
*Ping!*
2 posted on 12/29/2008 2:27:15 PM PST by rabscuttle385 ("If this be treason, then make the most of it!" —Patrick Henry)
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The Money, Banking, and Financial Markets Ping List.

"Money, not morality, is the principle commerce of civilized nations."
—Thomas Jefferson

FR Keywords: moneylist, bankinglist, financelist

Please tag all relevant threads with the aforementioned keywords.

This can be a very high-volume ping list at times.

Ping list jointly pinged by rabscuttle385 and TigerLikesRooster.

To join the ping list:
FReepmail rabscuttle385 with the subject line add  moneylist.
(Stop getting pings by sending the subject line drop moneylist.)


3 posted on 12/29/2008 2:27:35 PM PST by rabscuttle385 ("If this be treason, then make the most of it!" —Patrick Henry)
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To: rabscuttle385

Heard of at least 2 different people this weekend complaining of this.

One guy with an American Express (must be paid off every month) $50,000 limit reduced to $5000. He couldn’t fill his trucks with gas for daily ops.

I predict the next major mass murder to be at a financial institution.


4 posted on 12/29/2008 2:30:55 PM PST by wolfcreek (I see miles and miles of Texas....let's keep it that way.)
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To: rabscuttle385
TD Banknorth is going through a rash of this stupidity currently... Dumping them like a bad habit shortly.
5 posted on 12/29/2008 2:31:07 PM PST by xcamel (The urge to save humanity is always a false front for the urge to rule it. - H. L. Mencken)
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To: xcamel
Heard of at least 2 different people this weekend complaining of this.

One guy with an American Express (must be paid off every month) $50,000 limit reduced to $5000. He couldn’t fill his trucks with gas for daily ops.

I predict the next major mass murder to be at a financial institution.

I don't understand. If your credit line is being reduced, why not get more credit cards. I currently have three cards and am always receiving advertisementd for more.

6 posted on 12/29/2008 2:39:01 PM PST by NRG1973
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To: wolfcreek

I know of another business that AmEx messed with by aggressively lowering their credit limit. The company was always current with their payments and their credit was good. It caused a major headache for the company and cash flow had to be restructured because the cc was being used for multiple purposes. AmEx shot themselves in the foot because now the company doesn’t use the AmEx card as much, so they’re missing out on the merchant fees from the inventory and other things the company was using the card for (which is how AmEx makes a lot of it’s money since you can’t carry a balance their $$$ doesn’t come from interest payments.)


7 posted on 12/29/2008 2:39:38 PM PST by Dawn531
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To: rabscuttle385

This notion of a “premeditated bust out” where someone runs up a card with no intention of paying it amazes me. I can understand that some people commit fraud and do this, but the idea that the average American would do something like this is sad. More evidence that we have lost the notion of personal responsibility in our culture. Give me something for nothing—that’s the new American Way.


8 posted on 12/29/2008 2:39:53 PM PST by Opinionated Blowhard
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To: Dawn531

I know many businesses that no longer take credit cards because of the high user fees. It’s cutting into their profits.

In this economy (LOL!) not using credit cards = good idea.


9 posted on 12/29/2008 2:42:37 PM PST by wolfcreek (I see miles and miles of Texas....let's keep it that way.)
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To: Opinionated Blowhard
It has nothing to do with this, AMEX ain't visa they don't just hand them out like candy. It's yet another instance where financial institutions go into a nutty panic and in the end only hurt themselves.

They aren't doing this to late pay customers, these are happening to long term customers with excellent records. Most of them find out about the cut when they attempt to purchase something. They are not even given advanced notice.

10 posted on 12/29/2008 2:43:26 PM PST by spikeytx86 (Pray for Democrats for they have been brainwashed by their fruity little club.)
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To: NRG1973

those days of give-away cards may be numbered.


11 posted on 12/29/2008 2:43:39 PM PST by pointsal
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To: NRG1973

I wasn’t talking about credit cards, I was talking about a real multi-million dollar corporate credit line. You responded to the wrong post.


12 posted on 12/29/2008 2:43:46 PM PST by xcamel (The urge to save humanity is always a false front for the urge to rule it. - H. L. Mencken)
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To: rabscuttle385

Did GMAC get a “bail out” today. I just found out our Church has some funds there but only a small amount compared to last year at this time when they spent most of it on a addition.


13 posted on 12/29/2008 2:46:48 PM PST by tubebender (Retirement...The art and science of Killing time before it Kills you...)
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To: Dawn531

Amex does have cards that works just like a credit card with interest, etc. Not all are a “charge card.”


14 posted on 12/29/2008 2:48:57 PM PST by rb22982
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To: wolfcreek

I’m talking about businesses though that rely on business AmEx cards for things like paying for Google or Yahoo advertising (the only way you can pay for it is by a CC) or put their inventory on a CC in order to expedite it’s delivery. Even UPS (if the company does shipping) requires that a CC be used for payment. So those types of charges are no longer being put on the AmEx card and AmEx is missing out on the fees the would be collecting, from google or UPS (the merchant fees.)


15 posted on 12/29/2008 2:50:22 PM PST by Dawn531
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To: rabscuttle385

While the CC companies care more about bust outs, that is a criminal or civil matter. Far more commonly, if one credit card becomes intolerable, consumers just switch to a different card.

For example, recently AMEX got into trouble because of questionable business practices, so it tried raising fees both to cardholders and to retailers. While they lost cardholders, the real pain there comes with the loss of retailers who will accept AMEX.


16 posted on 12/29/2008 2:53:42 PM PST by yefragetuwrabrumuy
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To: rabscuttle385

I heard one of the talking heads on CNBC declare that the banks have every right to hike an interest rate to 30% if they want to “...because you signed their blank check application and they need the money.”

We need the money, too, so I guess the bank will understand when we file bankruptcy and walk away from their theft ring.

And I fully understand the poster who opined that there will probably be murderous rampages at financial institutions by deranged borrowers who have been pushed to the wall and have nothing else to lose.


17 posted on 12/29/2008 2:57:37 PM PST by Dick Bachert
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To: Opinionated Blowhard

that is because “bustout” is a bunch of BS.

In bankruptcy, ANYTHING you do three months before you file bankruptcy is PRESUMED you have the knowledge you are going to file bankruptcy.

There is a ONE YEAR preference period where your transfers of assets to family and insiders (business partners) is supect and reversable.

Finally there is a FOUR YEAR statute of fraud period.

there are other date highlights but this are the major ones.

The notion of going to disney or a cruise then filing bankruptcy of utter BS. All the charges made there would become non dischargable.

What is really killing the credit card companies now is they are not able to sell off the bad debt AND people have grown wise to the credit consolodator scam. (aka glorified collection agencies who hurt more than help)

The credit agencies and banks saw this storm comming so they tried to prevent bankruptcy protection for these people.


18 posted on 12/29/2008 3:01:40 PM PST by longtermmemmory (VOTE! http://www.senate.gov and http://www.house.gov)
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To: NRG1973
I don't understand. If your credit line is being reduced, why not get more credit cards. I currently have three cards and am always receiving advertisementd for more.

Because your FICO score is partially based on how much available credit you have (as a ratio), when the amount you can borrow is lowered, your FICO score goes down. When your FICO score goes down you pay MORE for credit. Even if you do get a new card, there's a good chance the interest rate you'll be charged will be higher. And even worse, when your FICO score goes down, all your current credit cards can raise their rates.

19 posted on 12/29/2008 3:03:31 PM PST by GOPJ (GM's market value is a third of Bed, Bath and Beyond. Why is GM "too big to fail"? Steyn)
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To: NRG1973; xcamel
I don't understand. If your credit line is being reduced, why not get more credit cards. I currently have three cards and am always receiving advertisementd for more.

Because your FICO score is partially based on how much available credit you have (as a ratio), when the amount you can borrow is lowered, your FICO score goes down. When your FICO score goes down you pay MORE for credit. Even if you do get a new card, there's a good chance the interest rate you'll be charged will be higher. And even worse, when your FICO score goes down, all your current credit cards can raise their rates.

20 posted on 12/29/2008 3:05:30 PM PST by GOPJ (GM's market value is a third of Bed, Bath and Beyond. Why is GM "too big to fail"? Steyn)
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To: yefragetuwrabrumuy

remember AMEX’s investment arm for the investor class was performing so poorly they changed the name in order to prevent the association with AMEX.

(blackstone I believe)

perhaps teh usury laws need updating.

if 30% is ok why not 50% or 100%?

given the fees upon fees for fees, it is essentially usury when the account finally is written off and deducted from their balance sheet.


21 posted on 12/29/2008 3:07:29 PM PST by longtermmemmory (VOTE! http://www.senate.gov and http://www.house.gov)
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To: longtermmemmory; yefragetuwrabrumuy; Dick Bachert
if 30% is ok why not 50% or 100%?

According to one card contract that I have with Bank of America, the maximum interest rate is 99 percent.

given the fees upon fees for fees, it is essentially usury when the account finally is written off and deducted from their balance sheet.

The majority of credit cards are securitized and not on the banks' balance sheets at all. What caused the contraction in unsecured credit card lines during the past few months is the fact that the market for securitized credit card receivables dried up; the same thing happened in the student loan market. Now, new credit card lending shows up on bank balance sheets, more or less. As for most older credit card lending, the banks are essentially acting as loan servicers.

22 posted on 12/29/2008 3:13:43 PM PST by rabscuttle385 ("If this be treason, then make the most of it!" —Patrick Henry)
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To: Opinionated Blowhard

Why does the bustout amaze you? People’s paychecks are raided weekly by the federal and state thieves. The banks conspire to screw individuals and business customers by playing games with interest rates and credit lines whilst your taxes pay for their bailouts. I can understand why some people are tempted to give it back as good as they got.


23 posted on 12/29/2008 3:13:59 PM PST by informavoracious
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To: rabscuttle385
Cardholders whose credit limits are cut down to their existing balances may decide that their card bill is no longer a priority for payment, "because that card has no utility for me anymore," said Mr. Bailey, who is retired.

Smart guy.

24 posted on 12/29/2008 3:21:03 PM PST by Centurion2000 (To protect and defend ... against all enemies, foreign and domestic .... by any means necessary.)
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To: Dick Bachert
I heard one of the talking heads on CNBC declare that the banks have every right to hike an interest rate to 30% if they want to “...because you signed their blank check application and they need the money.”

Frankly, we TAXPAYERS should be charging each of these financial institutions the same highest rate they charge their customers for any bailout money they receive.

For them to charge folks 20% - 30% and then get taxpayer money for free really frosts me.

25 posted on 12/29/2008 3:26:43 PM PST by VeniVidiVici (All hail the Obamasiah! Kneel before Obamohammad!)
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To: rabscuttle385
"Cutting lines may alienate reliable cardholders, who usually can take their business elsewhere, leaving an issuer with the dregs. "

That's what's going to happen to them if the screw with my credit limits! My balances are always less that a third of my available credit, and way less that that on all but one card I have now. Since it's zero interest until May, no sweat, no worries.

26 posted on 12/29/2008 3:33:00 PM PST by hunter112 (We seem to be on an excrement river in a Native American watercraft without a propulsion device.)
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To: VeniVidiVici

The sad fact is that 100,000 plus bank employees will be unemployed over the next 4-6 months. A bail-out with no workers protection? Real nice.


27 posted on 12/29/2008 3:33:33 PM PST by maineman (Neocon)
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To: NRG1973
I don't understand. If your credit line is being reduced, why not get more credit cards.

When your credit line is reduced, it looks like you have a higher debt to available credit ratio. That brings your credit score down, and makes it harder to get new credit.

28 posted on 12/29/2008 3:35:18 PM PST by hunter112 (We seem to be on an excrement river in a Native American watercraft without a propulsion device.)
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To: Opinionated Blowhard

They should have never criminalized duels, and debtors prisons!


29 posted on 12/29/2008 4:10:09 PM PST by Freedom4US
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To: informavoracious

The snow this weekend caused my car port to cave in:(. This means I have to build my garage;).\
So I go to a credit union and my bank. We own the property outright, no mortgage at all.
5 acres, souther exposure, cleared, and with a mountain view.
Could not get a loan.
Issue is the house is a double wide over ten years, and they are not loaning on these any longer. So much for the bail out softening loans.

Each one of us owes $12,000 to the government thanks to the bailout, I feel like sending the credit card company a bill for my loan to them, and telling them to $%^ ^&*(.


30 posted on 12/29/2008 4:14:22 PM PST by Colvin (Bikes for Mental Tykes...)
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To: wolfcreek
n this economy (LOL!) not using credit cards = good idea.

Basically credit cards provide a mechanism for financial institutions to take a 3% cut + a couple of months interest on a major fraction of the US economy for doing what is little more than a very expensive check clearing operation.

31 posted on 12/29/2008 5:01:15 PM PST by AndyJackson
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To: Dick Bachert
so I guess the bank will understand when we file bankruptcy and walk away from their theft ring.

Remember, the credit card lenders got the bankruptcy laws changed a few years ago (at the expense of the secured lenders).

32 posted on 12/29/2008 5:18:42 PM PST by PAR35
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To: AndyJackson

We use ours for reserving hotel rooms, rentals, buying on-line etc., never for paying monthly bills or running day to day ops.


33 posted on 12/30/2008 3:38:20 AM PST by wolfcreek (I see miles and miles of Texas....let's keep it that way.)
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To: spikeytx86
They aren't doing this to late pay customers, these are happening to long term customers with excellent records. Most of them find out about the cut when they attempt to purchase something. They are not even given advanced notice. Yep--happened to my business Amex account. We have used it exactly once in the past year and my wife attempted to charge to it last week and found out it was canceled. They had given us NO notice....and there was no reason for cancellation--as I said, we've used it ONCE and paid that off when the invoice came.
34 posted on 12/30/2008 4:08:14 AM PST by LexRex in TN ("A republic, if you can keep it.......")
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