Summary
The large banks and credit card issuers have moved in big ways ahead of the date for the effectiveness of credit reforms. These reforms will have major impacts for consumers and will also have a significant impact of near term economic growth. These recent changes will be seen in the drop in consumer credit.
Analysis
Issuers of credit cards have recently made several large moves. Issuers have lowered credit limits for customers, increased rates and fees, and increased minimum payments. The combination of all of these moves has been to significantly effect the available credit to US consumers and a significant increase in the cost of credit.
The Issuers have actually created some problems for themselves with these actions. It is highly likely that marginal credit customers with rate and payment increases could be forced into bankruptcy by these actions. Even more concerning is the fact that these steps will significantly impact near term consumer buying and delay economic recovery.
The actions currently being taken by the issuers should have taken place long ago. Credit was improperly price and credit limits where not realistic. Many actions being taken by issuers today are against customers who have never made a late payment. While some have had significant changes to their credit scores, many haven't, but have still had significant changes to their terms.
Longer term these actions will be good for the banks profitability and should create consumers that are using less credit. Assuming these consumers are now saving more and are better prepared for the next downturn the lower credit usage could be a long term positive. For now these actions only hurt the current economy and could create additional personal bankruptcy -- but they are actions that should have taken place long ago. Anytime credit risk is not properly priced for an extended period of time the result is a painful market correction.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
