Credit Crunch Hits Consumer Credit Cards with American Express’ New Policy

On October 7, American Express revealed that they will begin limiting their customers’ access to credit based on both where they shop and which bank holds their primary mortgage. While there is nothing in the law that prevents American Express (or any other credit card company) from doing this, the announcement is noteworthy coming from what many assume to be the creme de la creme of unsecured personal credit lines.

The credit crunch is about to hit the consumer pocketbook in a big and personal way, starting with credit card companies looking for ways to limit or freeze personal credit lines. The reasons for the lowered limits are not always obvious, and they may or may not have anything to do with the customer’s financial balance sheet. American Express would not reveal the stores or banks that they considered “risky,” but if you happen to have an association with one of them, however tenuous, look to see your credit limit lowered or arbitrarily frozen very soon.

According to the consulting firm Innovest StrategicValue Advisors, banks will charge off nearly $96 billion in delinquent credit card debit in 2009, nearly twice the amount charged off in 2008. Many customers who very recently had access to home equity lines of credit, business lines of credit, or unsecured bank loans are now seeing these sources dry up due to the credit crunch. As a result, they are leaning on the option of last resort: credit cards. Credit card issuers are falling all over themselves trying to get ahead of the problem.

In a worst case scenario, a good customer (as in, a customer who pays on time and has been doing so for years) could see his or her credit limit arbitrarily lowered and then exceeded before even realizing that had happened. Sometimes, just the interest accruing on a large balance will exceed a lowered credit limit before a customer has any time to do anything about it. Once the limit is exceeded, the credit card issuer can and will hike the interest to 32%, charge over-limit fees, and push the customer even closer to default.

Why would credit card companies do this?

Because credit card companies can’t just close an open line and demand payment in full; what they are doing instead is encouraging customers to transfer their large balances elsewhere. Look for balance transfer fees to jump dramatically as well in coming months (or weeks) as banks and other financial firms look to discourage these balances from hopping aboard their own sinking ships.

According to Carol Kaplan of the American Bankers Association,

(Banks) have suffered a lot of losses and they are doing whatever they can to reduce risk. They have people that work all day and all night who try to come up with new formulas to assess risk.

These risk assessment formulas are getting much stiffer and much more conservative almost overnight. Anyone with a credit card balance that is in excess of 30% of the limit will likely see changes to the limit itself and the rate and fee structure in the very near future, and some analysts are recommending that customers carry a balance of no more that 10% of the limit in order to avoid punitive fees and rate hikes.

What this means for consumers who, since 2006, have had to rely ever more on their credit cards to pay for basic services, food, and taxes is that the last well of credit is about to run dry, leaving them with only their inadequate incomes to cover costs this winter and Christmas season. Add this to the fact that home heating oil and natural gas are expected to increase by double digits this winter and the fact that many people still haven’t paid off last year’s heating bills yet, and you have a recipe for disaster.

The Federal Reserve, Congress, and the U.S. Treasury are still intently focused on simply stabilizing Wall Street right now. The $700 billion bail-out package is looking ever more anemic in the face of a world market crisis, the credit crunch has not abated at all at the interbank level (the LIBOR rate is still rising, and commercial paper is still impossible). Understandably, the systemic cardiac arrest is getting the first response, inadequate though it may be at the moment.

But not too far down the road, the same financial credit stroke is about to hit American households one by one, right at the beginning of winter and the start of a holiday season that promises to be one of the most dismal on record.

Let’s hope something works. Soon.

2 comments to Credit Crunch Hits Consumer Credit Cards with American Express’ New Policy

  • Raymond

    The firms that did not properly asses their risk and consumers who did the same are both standing in the bail-out line.
    Who is to blame?

  • Evelyn Black

    Hi Raymond,

    I think both share the blame, but also, real wages have been declining and credit card companies have been charging usurious interest and granting insane limits for years. So I think that yes, there is lots of blame to go around–but at this point correctly assigning blame unfortunately won’t help the country or the people living here. Thanks for your comments. I appreciate hearing from you.

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