Credit cards have become as synonymous with America as baseball and apple pie--but those days may be coming to an end. According to one industry analyst, the financial industry may cut as much as $2 trillion in credit card account lines over the next 18 months in order to reduce risk of damage from increasing delinquencies and defaults.
"[W]e expect available consumer liquidity in the form of credit-card lines to decline by 45 percent," Oppenheimer & Co analyst Meredith Whitney told Reuters news service.
Whitney reported that all three of the remaining major banks--Bank of America, Citigroup, and JP Morgan Chase were planning or considering reducing credit lines across the board.
Whitney said that credit cards were the second source of liquidity available to consumers, behind wages from work. She criticized the banking industry for offering ever fewer choices at a time when consumers would need credit more than ever.
"Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view," Whitney said.
A contraction in available consumer credit has been predicted for several months since the scope of the economic crisis became apparent. Banks and lenders, exposed to enormous potential defaults from the slumping housing market, began cutting back on credit card account lines while simultaneously raising interest rates, even for the best customers who paid on time and exhibited no risky behavior.
Banks and lenders' ability to change the terms of credit card agreements for any reason has shocked many cardholders, who saw their interest rates double or even triple in recent months despite good payment behavior.
Although the credit pullback has had the welcome side effect of reducing the number of credit card solicitations people get in their mailboxes, it still represents a potentially dangerous economic shock that could rival--or surpass--the slump born from the housing market.
Several studies have confirmed that Americans are cutting back on buying luxuries with credit cards, using them to buy necessities instead--and that more cardholders are having trouble keeping up with their payments.
Whitney recommended several solutions for the lending crisis, including a return to local lending and knowing customers' business histories, rather than relying on automated credit scoring systems.
The House of Representatives also passed a "Credit Cardholder's Bill of Rights" that would restrict particularly egregious billing and penalty traps last year in the waning days of Congress. The bill was put aside to focus on negotiations for the financial industry bailout, and no word has emerged as to when it will be taken up again.