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alstry (36.17)

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March 03, 2009 – Comments (12)

American Express, Chase Cut Card Limits, Lowering Credit Scores

 

March 3 (Bloomberg) -- Wayne Brown has a dilemma. If he reduces his credit-card balance, American Express Co. will cut his credit limit to the amount of the new balance, he said. If he doesn’t make a big payment, his interest rate may skyrocket.

The credit limits on Brown’s cards have been lowered, which has raised his debt relative to his available credit. This so- called utilization rate is a key factor in determining credit scores. Brown, a 58-year-old construction company owner in San Diego, has seen his credit score drop to 650 from 760 over the past 13 months.

“Interest rates on all of my cards are going up now and my minimum payments are almost doubling because it looks like I’ve maxed out my cards,” said Brown, who uses credit cards to fund his home-building company. “It’s a Catch-22.”

About 45 percent of U.S. banks reduced credit limits for new or existing credit-card customers in the fourth quarter of 2008, according to a Federal Reserve January survey of senior loan officers. Financial institutions may slash $2 trillion in credit- card lines in the next 18 months, Meredith Whitney, a former Oppenheimer & Co. analyst, wrote in a Nov. 30 report.

“You’re no longer immune if you have good credit,” said Curtis Arnold, the founder of CardRatings.com, a Web site that reviews credit cards. “The issuers hold the cards, literally.”

Credit-card issuers such as New York-based American Express, Citigroup Inc. and JPMorgan Chase & Co. have cut credit limits to guard against risk and prevent delinquency and charge- off rates from increasing, said Arnold, who is based in Little Rock, Arkansas. Charge-offs are loans the banks don’t expect to be repaid and were 7.1 percent on average in January compared with 4.6 percent a year earlier, according to data compiled by Bloomberg.

Pay Off Balances

If credit-card limits are decreased, consumers should pay off balances as quickly as possible, consider making online payments before the monthly statement arrives to reduce debt and weigh transferring balances to a card with a lower rate, said Jeff Blyskal, a senior editor of Consumer Reports. Blyskal, who is based in San Francisco, said consumers should beware of teaser rates and high fees when transferring balances.

“Don’t cancel the card to spite the card company because you’ll just hurt your own credit,” said Emily Peters, San Francisco-based personal finance expert at consumer Web Site credit.com.

Cardholders will damage their credit history if they cancel an older account and lose the available credit on that card, she said. Credit-score companies look at the total amount of debt relative to credit limits on all credit cards when evaluating scores.

$300 Offer

American Express, the largest U.S. credit-card company by purchases, is offering $300 to some customers if they pay their balances in full by April 30 to reduce the risk of defaults.

Chase increased the minimum payment to 5 percent from 2 percent for certain borrowers with large balances, Capital One Financial Corp. increased the rates for new customers on fifteen cards and Citigroup and Bank of America Corp. began charging a 3 percent fee for all transactions made outside the U.S. in U.S. dollars, according to Bill Hardekopf, chief executive officer of LowCards.com, a Web site that compares the rates of almost 1,100 credit cards.

Consumers are falling behind on credit-card payments as U.S. unemployment reached 7.6 percent in January, the highest rate since 1992.

Charge-Off Rates

American Express’s charge-off rates of loans rose to 8.29 percent in January from 7.23 percent a month earlier, a 15 percent increase, based on Bloomberg data. Chase’s charge-off rates increased to 5.94 percent from 5.32 percent, a 12 percent jump.

Desiree Fish, a spokeswoman for American Express, said consumers’ overall debt levels relative to their financial resources is the primary factor for any credit-limit reduction. She declined to comment on the specifics of Brown’s case.

Citigroup is lowering credit limits because of the market environment and deterioration of consumer credit, said Samuel Wang, a spokesman for Citigroup.

Gordon Smith, JPMorgan’s chief executive officer of card services, said at an investor-day presentation on Feb. 26 Chase decreased credit lines or closed accounts in 2008 totaling $129 billion. Credit lines to new and existing customers were increased by $107 billion in 2008, Smith said.

Cardholders most likely to see credit limits slashed have large balances, delinquent payments or recent dips in credit scores, said Arnold of CardRatings.com. Consumers who don’t use their cards very often may also see limits cut because they aren’t profitable for issuers, said Peters of credit.com.

No Advance Notice

Critz George, a retired nuclear engineer and physicist in Albuquerque, New Mexico, said he had three Chase cards and one Citibank card closed because of inactivity, without advance notice. George, 71, said he fears having four lines of credit closed will lower his credit score. “I feel like it was an arbitrary and capricious decision because I have paid in full and on-time for the last 20 years,” he said.

Brown, who is a mortgage broker in addition to his construction business, said he was always careful to keep his balance at one-third of the limit. He said the reduced credit limits on his American Express and Bank of America cards have made that impossible.

“I’m angry because I’ve always been proud of my credit history and now it’s gone to hell, not because of something I’ve done.”

12 Comments – Post Your Own

#1) On March 03, 2009 at 7:19 PM, alstry (36.17) wrote:

Imagine America without credit cards....................it is not necessarily a bad thing for people to pay as they go and buy only what they can afford.......HOWEVER, what do you think will happen to retail sales????  How many jobs will be lost?????  How many stores will go bankrupt????  How much retail space will go dard????  How far will property values plunge??????  Welcome to deflation nation......

Soon everyone will understand Alstrynomic's key theory...... Concentric Contraction .

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#2) On March 03, 2009 at 7:26 PM, shffl (< 20) wrote:

alstry,

what do you mean by concentric contraction?

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#3) On March 03, 2009 at 7:38 PM, whereaminow (30.78) wrote:

I've heard a similar theory. Inflationary monetary policy, which creates bubble economies (and this is the biggest bubble economy in world history) causes malinvestment - i.e. business expansion that would not be justified in an environment with market determined interest rates, sound money, and 100% reserve banking. During the bubble everythings seems great. People are employed. Consumption skyrockets. But the crash is inevitable. The lesson has been taught. Will it ever be absorbed?

David in Qatar

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#4) On March 03, 2009 at 7:39 PM, LACEYLEE (< 20) wrote:

OH, BOY, WHAT A CONCEPT!!  PAYING YOUR BILLS AS YOU INCUR THEM!  YES, I USE CREDIT CARDS, BUT WE PAY THEM OFF AT THE END OF THE MONTH.  ARE YOU ADDIDCTED OR CAN YOU QUIT "COLD TURKEY?"  HERE'S THE TEST: 

GO TO AN ELECTRONICS STORE AND PICK OUT A GOTTA HAVE ITEM FOR $500-1,000.  PAY FOR IT WITH PLASTIC.  TAKE IT BACK THE NEXT DAY FOR A REFUND.  NOW GO TO THE BANK AND GET THE CASH FROM YOUR SAVINGS ACCOUNT AND GO TRY TO BUY THE SAME ITEM USING AMERICAN GREENBACKS.  COULDN'T DO IT?  THEN YOU ARE ADDICTED TO CREDIT CARDS.  IN THIS ECONOMY, THE BEST WAY TO DOUBLE YOUR MONEY IS TO TAKE IT OUT, FOLD IT IN HALF AND PUT IT BACK INYOUR POCKET.  Report this comment
#5) On March 03, 2009 at 7:53 PM, alstry (36.17) wrote:

Concentric Contraction  is a theory developed by Alstrynomics.  It is the key theory of Alstrynomics.

Basically, visualize a centerpoint surrounded by concentric circles.  Each circle is a sector of the economy.  At the center, the circles expand to differing diameters due to increasing money supply PRIMARILY as a result of increasing debt creation.  When debt creation slows, the circles begin contracting.  As debt actually decreases, the contraction accellerates like a balloon losing air as everything shrivels to the centerpoint.

We are well on our way into the process......knowing this is what will separate CAPs investors from the mainstream....I am surprised the Gardner Brothers havn't picked up on it yet....but I guess we all learn at different rates.

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#6) On March 03, 2009 at 8:06 PM, alstry (36.17) wrote:

Clarification on the previous comment...it is not necessarily that we all learn at different rates....it is simply we bring different perspectives to the game........

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#7) On March 03, 2009 at 8:14 PM, Seano67 (27.71) wrote:

Yeah, this credit card stuff is interesting. I agree that it's probably ultimately for the best for America and Americans to wean themselves off their over-reliance on credit in a return to living more within our true means- however, that begs the question, what would America be if we weren't such a consumer-based economy?

I mean we have certainly receded in every other area of economic production over the past 20-30 years, be that agricultural, industrial, financial, etc etc etc....so as the largest consumptive society on the face of the earth, what will happen to us if/when that consumption permanently lowers, and what will happen to the rest of the world, which relies upon American consumption to feed their own exports and grow their own economies?

That's why it's not just America. We are so tied into the global economy anymore, that as America goes, so goes the world.

Frankly, I will welcome the end of a bubble-based economy. We need to get back to something solid and fundamental upon which to base our economy- like excellence in manufacturing, full utilization of the some of the richest and most productive farmland on earth (land with which we could literally feed the world), and good old American ingenuity, adaptability, and innovation. Stuff like that... 

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#8) On March 03, 2009 at 8:20 PM, alstry (36.17) wrote:

Seano....what is your background......????

You seem to be pretty level headed....clearly a person who would fit in well at the Institute of Alstrynomics otherwise known as the IOA.

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#9) On March 03, 2009 at 8:27 PM, Seano67 (27.71) wrote:

I'm a teacher, Alstry.I teach History and English to 6th graders.

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#10) On March 03, 2009 at 11:14 PM, jdeslaur (87.31) wrote:

Perhaps we can go back to an economy based on a trade surplus rather than a deficit.  I would be nice to see money coming into the country rather than shipping it out to other countries. 

And i think that with this new Credit Card development is a step in the right direction, we, as a country and as a nation need to start running our lives as a business.  If money out does not equal money in then lifestyle adjustments must be made. 

 I think that with the rise in gas prices the global distribution chain was shattered, IE it was not cheaper to have things manufactured around the world then sold on the opposite end again.

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#11) On March 04, 2009 at 12:34 AM, angusthermopylae (40.53) wrote:

Is this a good example of Concentric Contraction?

Take an industry town.  When times are good, the majority of workers and managers have income at or above inflation, and savings in the bank.  Because the bank has a good cash flow, they are about to make loans to new people coming into town for new or existing houses.  Based on the reserve rate, every dollar saved is multiplied throughout the town...homebuilders are paid, they go home and pay their bills, as well as buy cars, groceries, new TVs, etc.  Same for business and individuals getting loans.

Now, put it in reverse.  The company is barely getting by, so they freeze pay and cut a mere 10% of the work force.

Less money to factory workers => less discretionary spending, because....

Less savings => fewer mortgages (less money "created")

Less money going around => fewer new purchases

Fewer purchases => auxillary businesses cut back, close, or reduce jobs

Higher unemployment => bank tightens credit

Fewer loans => more tightening of belts...and even less spending...and more business closing...and higher unemployment.

So, if this example is correct, who is at fault?  Everyone blames the bank, because they are obviously hoarding money...right?  But that's not the total answer, is it?  The original cause was the factory cutting a little spending.  Hell, the stockholders probably even cheered at the "cost cutting."

The end effect is that the overall economy shrinks remarkably fast due to a single change in the system....the reverberations are felt in the most unexpected places...and feed the changes back into the system.

I think (and correct me, alstry, if I have it wrong), is that Concentric Contraction is the systemic feedback of the monetary system.  You can pick your center almost at will...the model will apply pretty much the same.

I believe that the trick is to find the correct center(s).  I know I'm going to be shouted down for this, but I'm pretty skeptical that the banks are the root cause of all our evils.  They are certainly complicit in its origins, and sure don't seem to be helping the problem...

...but I sincerely believe that the original issue is a couple of circles over...

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#12) On March 04, 2009 at 3:58 AM, alstry (36.17) wrote:

Angus,

Pretty much dead on.

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