Card Issuers Cutting Credit to Customers

I wrote about the problems credit card issuers will face in the current recession the other day. 95,000 people read the post. We talked about it on our YouTube show, What Are Your Thoughts, this week also. It’s an issue that I think is still under-appreciated by the markets right now.

This morning we learned that another 4.4 million people filed for unemployment last week. That brings the five-week running total to 26.5 million people. These numbers are absolutely astounding.

Bloomberg reports that two large credit card issuers, Discover and Synchrony, are already tinkering with the credit limits they offer to customers in light of this new reality:

Discover Financial Services just became the largest lender yet to acknowledge it’s begun reining in lines of credit. In a regulatory filing late Wednesday, the firm said it’s also easing off efforts to sign up new customers and that it expects to take a hit from programs letting existing borrowers skip payments or delay the accrual of interest.

and…

The announcement came a day after Synchrony Financial, the company behind cards for J.C. Penney Co., Gap Inc. and American Eagle Outfitters Inc., said it will try to stem losses by closely managing customers’ accounts. In a conference call with analysts Tuesday, Chief Financial Officer Brian Wenzel said the firm is using its own vast trove of data, as well as information from credit bureaus, to “dynamically reevaluate a customer’s creditworthiness.” That means some may be allowed to spend more, but others less.

These defensive moves are pretty much mandatory. A household running out of money for expenses this month is not racing to pay off its American Eagle Outfitters card. And the card issuers know it. Here’s Discover’s press statement: “Due to the nature and novelty of the crisis, our credit and economic models may not be able to adequately predict or forecast credit losses. The pace of recovery is uncertain and unpredictable.”

Source:

Credit Cards Start Cutting Limits for People Facing Tough Times (Bloomberg)

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The Next Leg Down Will Involve Credit Cards (TRB)