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Credit card issuers to cut $2 trillions?

Mon Dec 1, 2008 12:12PM | By Tony

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The story about credit card industry possibly cutting over $2 trillion in credit limits over the next 18 months due to risk aversion and regulatory changes barely made any noise. The consequences for economy and consumer spending, however, will be quite dreadful.

Given the size of ongoing credit card crisis which no one talks enough about, something has to be done. The problem with shaving over $2 trillions in credit card lines is that the consumer purchasing power will be drastically diminished even further, after lenders froze home equity lines of credit. While it is true that the credit card is the second key source of consumer liquidity, the first being jobs, the big ticket items like cars, boats, flat screen TVs, major home remodeling projects, etc. are often purchased and financed with the help of home equity credit lines. So in essence, I put the home equity lines of credit and high limit credit cards as first and second engines in their importance to the consumer spending. Sure the jobs must be there to keep those credit engines running with monthly payments, but people still have the jobs and gas prices are down more than 50% from just few weeks ago. But the purchasing power of the people which translates into consumer spending, which in turn, supposedly amounts to two-thirds of our economy is nowhere near what it once was.

So the credit card industry decision to cut $2 trillions, if indeed becomes a fact, will surely bring consumer spending to the screeching halt. Now, I am not advocating a status quo, as banks are bleeding with all the credit card defaults, but merely warning of harsh times ahead. Be ready to have your credit card limit decreased, interest rate raised. Moreover, if you don't carry any balance, the credit card issuer may simply choose to close the account.

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