Meredith Whitney says Credit Cards Are the Next Credit Crunch

[CoffeeCat]

Source: Wall Street Journal

Few doubt the importance of consumer spending to the U.S. economy and its multiplier effect on the global economy, but what is underappreciated is the role of credit-card availability in that spending. 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. While those numbers look small relative to total mortgage debt of over $10.5 trillion, credit-card debt is revolving and accordingly being paid off and drawn down over and over, creating a critical role in commerce in America.


Just six months ago, I estimated that at least $2 trillion of available credit-card lines would be expunged from the system by the end of 2010. However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010.

Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy. Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57% contraction in credit-card lines.

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.

Read more: http://online.wsj.com/article/SB123664459331878113.html

---

Meredith Whitney was the first to say that Citi was gone. She was right, and she speaks again, this time about credit cards.

If anyone wants to know why credit-card companies are cancelling your cards, the answer is in this article. Credit-card
companies see the bleak economic future and each company is trying to avoid being the one holding the bag. The credit
card companies are cancelling cards so YOU'RE not holding their card in your hand when you finally realize that it's
survival of the fittest. They're afraid you'll spend wildly on whatever you need to survive--without any intention of
paying it back.

We saw "bank runs" during the Great Depression. I predict we'll see "credit card runs" during this Depression. Once people
realize that the situation is so bleak--they'll realize that it's every man and woman for himself. What unemployed person--who
realizes that we're in the midst of a financial Katrina--wouldn't run to Walmart to purchase food, water and other essentials in
order to save his family?

So, don't wonder any longer. When your rates are raised horrendously or when they charge you unfair fees--they're trying to
get you to cancel. When they reduce your lines of credit--they're trying to limit the damage you can inflict.

The credit-card companies are done bilking us. At this point, they see what will happen to the economy--and they're trying to
cut their losses.

----------------

[Skink]

1. Somthing is wrong when you have a 10$ min. payment and one day late gets you a 39 $ fee

[dkf]

3. Put it on autopay for at least the minimum.

So easy to do!

[Supersedeas]

17. gotcha by the gonads of convenience

[dkf]

2. Everyone needs to pay off their credit cards ASAP.

Otherwise you will be screwed.

[CoffeeCat]

5. Yes, the credit-card companies are done with us...

It is clear from their behavior--that the credit-card companies are done stealing our money
and enslaving us.

They've made trillions from our carcasses and now they want to cut us loose.

Right now, they're just cancelling cards, raising interest rates and charging unfair fees.

Wait until they really try to shake you loose.

They can do whatever the hell they please--call in full balances, charge 50 percent interest. They've
only just begun trying to get you to hate them enough to cancel your card.

This entire chapter is so revealing. The companies know exactly what's in store for our economic futures--a Kormac
McCarthyesqe financial disaster.

These companies are scrambling to get those cards back from Americans. They know there will be massive panic
and those companies don't want their cards in your wallets when that happens.

[dkf]

6. Yup. They used to love our hefty balances.

Now that these balances represent vulnerability they will do whatever it takes to get us out.

I feel for people who have credit card balances beyond their ability to pay in a timely fashion. They need to consolidate to a fixed rate loan if at all humanly possible.

[apnu]

14. That subject is so wrong.

Not you posting it but the general concept that, until recently, credit card companies loved carrying other people's debt. That never made sense to me, it still doesn't, and now the world is waking up to that notion.

It is almost as if these companies never considered that someday, this debt would have to be paid.

[zipplewrath]

8. This is slightly simplistic

I understand what you're getting at, but they still need to be able to generate transactions in order to make profits. The risk of course is that they'll generate those though debit transactions, not debt. There is still too much to be made from debt for them to dump it entirely, but they probably will be trying to severly limit their exposure by reducing the "available credit" to vastly lower levels. I remember when I first got my cards, I had limits like $500. Even "good" risks only had $10,000 or so. I suspect ultimately we may see a return to those levels. Low to moderate lines which "self terminate" when they are exceeded. It would prevent the kinds of "runs on credit" that you suggest. It will also be interesting to see if we se a return to the "charge card". The original Amex Green card, and I believe the Diners Club were charge cards, payable at the time of billing. They still generate transactions, but there is no line of credit, other than the billing cycle.

Amex definitely isn't trying to get me to cancel, they've offered me a platinum card twice in the last month. But that's a charge card, and it comes with a hefty monthly fee. That's another change we may see coming. Fee based cards, and that's what you'll see is card issuers trying to get you to cancel a fee-free card so that you convert to a fee based card.

[CoffeeCat]

10. There was an AmEx thread on DU...

Yesterday, there was a thread about AmEx. Many DUers were reporting that AmEx was cancelling their
card (I'll see if I can find this thread and I'll post it here).

I found that very intriguing. Especially because, as you said, it's a charge card on which balances are paid in full each month.

It became pretty clear to me, that these companies are scrambling to reduce their losses.

This opinion piece by Meredith Whitney says that these credit-card companies are cancelling people--based on their zip code!
Even though these people have stellar credit and sterling payment histories, if they live in an area hard hit by the housing
crisis or layoffs--they're nixed.

That was anecdotal stuff discussed on DU yesterday. Today, Meredith's opinion piece just pulls it all together and explains
why the companies are doing this.

I find all of this completely mind blowing.

[Hassin Bin Sober]

12. I think they are also looking to free up THEIR credit limit by reducing ours.

We just had one with a 10k limit canceled on us by RBS.

The letter basically said "Since you don't use our card, it's best we part company"

I assume they would rather have that 10k available for someone who actually uses it.

[zipplewrath]

15. Sledge hammers on tacks

None of the following should be interpreted as a defense of the credit card industry.

What's going on here is the incompetent reacting with panic. They securitized our debt and sold it off. They weren't lending you THEIR money, they were lending you other peoples money. They can't do that anymore. So they now have to lend their money, and they don't have it. So they have to reduce the total amount they've lent, and they have to reduce the amount of available credit. So people who aren't using theirs at all get cut. People who are already deep in debt (even if they aren't "maxed out") are being limited. The CC companies are panicking and they are lumping millions of people into groups without any consideration of the individual behavior or risk. On an individual level, they are doing things to certain folks that make no sense, folks that are paying interest, in a timely manner, on modest credit levels. They are doing this because they are scared and just want to "cut their losses". Once they get their credit lines available in line with their capitalization, they'll stop running in a panic mode and start to sort out their customers. In the meantime, if you want to keep your cards (and I can understand folks who don't want them anymore) do your best to stay below their poorly functioning radar. Set up some form of direct payment, pay down balances but continue to use the card modestly, and don't voluntarily cancel cards because it scares them and they don't want to be your LAST credit card.

[CoffeeCat]

11. Here's yesterday's DU thread that discusses Amex...

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x5213090

[Tandalayo_Scheisskopf]

4. I am so fucking glad...

I do not have one of those plastic Tools of Satan, with the cocommitent bills and fees hanging over my head.

Those companies can duck my sick.

[Gormy Cuss]

7. "lenders became overly reliant on FICO scores that have borne out to be simply unreliable."

I'm glad she made that observation and the too generous "(o)verly optimistic underwriting standards." Now if only the industry would fess up to the same.

What's sad is that people who do think of the credit cards as the loan source of last resort are going to have that yanked away, and then where will they be?

[semillama]

9. When credit card companies are "done with us"

ultimately, won't it mean that WE are done with THEM? By canceling a customer's card, they're basically guaranteeing the loss of not only that customer for life, but other potential customers that will be warned off applying for cards with that company by friends and family who have been cut off. In the long term, this may end up backfiring majorly on the CC companies - at least we can hope so.

[CoffeeCat]

13. I think the credit-card companies...

...understand the financial disaster that is going to hit this country and leave us in shreds.

In the short term and near long term--credit cards will be a moot topic.

Surviving will be front and center.

It's going to be a different world for a while--as our current system topples--and a new system is born.

Corporations know. They see what's coming. Clearly, they're preparing.

There's a DUer who works for a major retailer who has said that their executives predicted Depression-like circumstances
months ago. The company (one of the top 3 major big-box retailers) has plans to strip out all Express Lanes. In the
poster's own words--the company has such a bleak outlook on the economy--they feel that all cashier lanes will be "Express
Lanes" because people will be buying very little--if anything at all.

Corporations devote entire departments to market research and sales forecasts. They know.

[wildflower]

16. Does this apply to credit unions?

I've heard they are safer. (Credit unions, that is.)

[Igel]

18. I don't understand Whitney's problem.

She says $800 billion in revolving debt is used (so therefore that's what's needed) and there's $5 trillion extended.

She's worried that the debt capacity will be cut to $2.15 trillion. $2.15 trillion >> $800 billion ( ">>" = much larger than).

Now, in some cases credit that's used will be cut. But for the most part? She doesn't make her case.

[bikebloke]

19. My bank was just bought by Capital One.

I'd already been looking for a new bank, since the current one (a local bank) was burned in the mortgage meltdown and its rating plummeted. Capital One is hoping the deposits in my bank will keep them from sinking.

So now I'm checking out smaller local banks. I had one in mind, then read that they're hoping to capitalize on buying failing bank assets with TARP money. I'm running out of alternative banks.