Credit Line Cuts Could Boomerang [big banks shooting themselves in the foot]

American Banker ^ | 2008-12-29 | Maria Aspan

[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.

[longtermmemmory]

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.

[rabscuttle385]

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.

[informavoracious]

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.

[Centurion2000]

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.

[VeniVidiVici]

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.

[hunter112]

"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.

[maineman]

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.

[hunter112]

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.

[Freedom4US]

They should have never criminalized duels, and debtors prisons!

[Colvin]

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 $%^ ^&*(.

[AndyJackson]

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.

[PAR35]

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).

[wolfcreek]

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

[LexRex in TN]

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.