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What the Credit Crunch Looks Like

posted by Adam Levitin

The Maryland suburbs where I live have been fairly insulated from the economy's problems overall.  The federal government provides a steady economic anchor for the region, so we aren't too badly hit with layoffs. We don't have a major negative equity problem in the close-in suburbs, and not too many foreclosures.  And yet here, over the past few days the economic grim reaper's work is evident:  several GOB sales in downtown Bethesda, numerous 60% off clearance sales, and my bank branch has cut all weekend hours. I've seen several stores that are noticeably poorly stocked, and visibly fewer shoppers in a lot of stores.  I can only imagine how much worse it must be in some parts of the country.

But anecdote isn't the singular of data, so let me show a data graphic (from Carddata.com) that charts the credit crunch quite visibly:  the involuntary attrition rate on credit cards. This is the annualized percentage of card accounts outstanding that have been closed by the card issuer. That is, these are lines of credit that have been revoked. Note that starting in the summer/fall of 2007, card issuers began ruthlessly eliminating lines of credit, while consumers stopped closing their accounts voluntarily. This is a picture of consumers wanting credit and financial institutions turning off the spigot. I'll leave the issue of whether or not this was wise for another day, but let the graph speak for itself.
Card Attrition

Comments

Banks have seen oil at $150/barrel, and they know that consumers cannot afford that. The economy learns.

"Note that starting in the summer/fall of 2007, card issuers began ruthlessly eliminating lines of credit, while consumers stopped closing their accounts voluntarily. This is a picture of consumers wanting credit and financial institutions turning off the spigot."

in the aggregate, the behavior of lenders is for the most part rational. they are reducing their unfunded commitments in a period where liquidity is uncertain and the ability of borrower's to repay is uncertain. at the individual level, some of the decisions do not seem rational. my personal experience is a good example; with a fico well north of 700; solid job; low debt, etc. i had 2 cards canceled and the line on another reduced. the two cards canceled had no annual fee and had not been used in several years. the lenders gave no notice of the cancelations. perhaps they could have offered to continue the card if i was willing to pay an annual fee. essentially, i had a free lending commitment; great while it lasted, but in today's environment that is costly for a lender. hence, it is understandable for a lender to make this decision.

the problem is that many consumers are overextended and have relied on easy credit to sustain a lifestyle beyond thier income. primarily, credit cards should be used for convenience and fully paid each month. only extreme emergencies should be revolved, which does not include the next vacation or designer handbag. our society has too much debt and the coming reset to living within one's income is long overdue.

Wow SD. My wife and I seem to have a comparable story but instead of canceling our cards they raised the limits on both (by like 1k!). We are by no means "well north of 700", more like in the neighborhood. I guess its because we carried a balance for so long. It was like "common you can spend more now". They can hold their breath if they want. It did though raise our credit scores because now we owe way less than 1/2 on our credit limit.

Like "Turtle" said, "If you hear someone yelling, its time to pick up your feet....usually".

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