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As economy slows, US lenders begin to curb credit cards

(Agencies)
Updated: 2008-10-29 10:23

As the US economy slows and unempolyment rises, lenders are starting to worry about credit cards.

With more borrowers defaulting on their payments, the already beleaguered US banking industry may face another wave of unprecedented losses, The New York Times reported.

In the first half of 2008, lenders wrote off an estimated $21 billion in bad credit card loans.

Banks are sharply curtailing both credit card offers and sky-high credit lines to Americans, the report said, adding that the move is affecting even creditworthy consumers.

American Express, Bank of America, Citigroup and even the retailer Target -- have begun tightening standards for applicants and are culling their portfolios of the riskiest customers. Capital One, another big issuer, has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent in the second quarter from the previous period.

Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies, the report said.

Some of the changes haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action.

Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001, analyst said.

"If unemployment continues to increase, credit card net charge-offs could exceed historical norms," Gary L. Crittenden, Citigroup's chief financial officer, said.

The depth of the financial crisis has shocked the credit-hooked nation into rethinking its habits. Many families once content to buy now and pay later are eager to trim their reliance on credit cards. The US Treasury Department, which is spending billions of dollars in taxpayer money to clean up an economic mess brought on in part by all sorts of easy credit, recently started an advertising campaign inviting consumers to check into the "Bad Credit Hotel," an online game that teaches the basics of maintaining good credit.

At the same time, the fear factor among lenders has deepened just as the crisis makes it harder for some financially stretched consumers to wean themselves from credit cards for even basic needs, like gas and food.

"We are not going to say, 'Yahoo, this is over,' and extend credit like we did without fear," Jamie Dimon, JPMorgan Chase's chief executive, said in a recent conference call. "If you're not fearful, you're crazy."

Even those with good credit ratings are not excepted. American Express, which traditionally catered to more upscale cardholders, said it would be increasing effective interest rates by 2 or 3 percentage points for some of its credit card holders -- a move that could, for example, push a 15 percent rate up to 18 percent.

"We think it's prudent given the nature of those products and the economic environment we face," Daniel Henry, its chief financial officer, said in a recent conference call.

Some reward programs have also gotten stingier as lenders cut corners to save money. Card companies, for example, have taken to substituting cheaper brands for a Sony big-screen television as a way of lowering the cost of their redemption prizes.

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