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Credit Card Crunch: Creating a New Generation of Subprime


Credit Card Crunch: Creating a New Generation of Subprime

We're here to point out a potential unforeseen consequence of credit cards as the next credit crunch. The developments of credit card companies raising interest rates, cutting credit lines, and closing inactive accounts altogether has many consequences: Firstly, and most obviously, consumer confidence and consumer spending will drop off. Secondly, as such, the economy as a whole will continue to suffer. Lastly, and most unforeseen, FICO (credit) scores most likely will be reduced and millions of American consumers will essentially be 'downgraded' by way of their new, lower credit scores, further inhibiting their access to future credit. Many people are focused on how these actions will affect consumer spending (and rightly so). But, we also want to turn the focus to the decrease in consumer liquidity and how overly reliant consumers are on credit cards for cash-flow management.

Credit Cards Are the Next Credit Crunch

We'll break this down in the piece below, but first, some background. If you don't know who Meredith Whitney is, then shame on you. She has been one of the best analysts on all things financial, nailing the trouble at Citigroup (C) when no one wanted to believe it. She is the dominatrix of doom and she has recently put out a report on credit card companies, stating that financial institutions could cut up to $2.7 trillion in lines of credit that have been typically available to consumers. The bulk of her message was that this could happen by 2010 and that it would severely dampen consumer spending. Not only would it affect consumers, but it would affect small businesses as well, who often rely on credit cards to actively finance their day to day activities.

We've been harping on this issue for a while under the notion that credit cards are the next credit crunch. Companies like Bank of America (BAC), American Express (AXP), and Capital One (COF) have reported increase after increase in charge-offs and delinquencies in their credit card units. Obviously, rising unemployment and a hell of a recession are only going to add to that. Head of JPMorgan (JPM) Jamie Dimon has even flat out admitted that credit cards are going to be a house of pain for his company in 2009 and possibly beyond. We've posted on this issue back in August of 2008 and will continue to harp on it until we see material improvement. But, while more people seem to be coming around to the fact that credit cards will indeed be a big problem going forward, the magnitude of the issue still needs to be highlighted.

Using credit cards for everyday 'emergencies'

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