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Credit Card Line Reductions and Eliminations

posted by Adam Levitin

Chargeoffs In the coming months and years we are likely to hear the banking industry and its supporters blame the Credit CARD Act for reductions in consumer credit availability.  That might end up being the case, but we should be skeptical of the claim (and of the magnitude asserted) until we see some data that supports such a finding.  The fact of the matter is that there is already a tremendous credit contraction going on in the credit card space.  The chart using data from Carddata.com shows the annualized rate at which card issuers are closing down accounts at their own initiative.  As of April, it was 19.01% (I understand that to mean that in April about 1.6% (=.19/12) of all accounts were closed).  Remember, this is account closings, not credit line reductions, which are occuring on top of the account closings. 

In other words, a fair conclusion is that even without the legislation, we'd be seeing credit lines cut and eliminated right and left.  That means it just won't do to rest on priors and fall back on the syllogism of more regulation means more costs means less credit available.  To be fair, there could be an anticipatory effect showing up in the account attrition data.  But the legislation doesn't start to go into effect until late August, and a lot of it doesn't go into effect until 2010.  So a profit maximizing issuer would probably want to close the accounts that are profitable under current law, but not under the new law on the day before the legislation goes into effect, rather than a few months ahead.



The chart well illustrates one of the reasons why the vote on the law was so lopsided in favor of its passage. The card issuers' argument against the law boiled down to "If you pass this law, we'll have to slam consumers with all sorts of punitive actions ... that we're already doing."

When you're in the middle of a whipping, being threatened with a whipping is not much of a threat.

Closing down of accounts and credit line reduction have started many months ago.

This is in response to the expectance of high default rate as the unemployment rate is on the rise.

The industry will somehow find a way to compensate for the expected loss of income.

Charging annual fee is the easiest way to do so.

American Express has been saying the act will not affect their income. One of the main reason is their high-end card comes with annual fee.

So what else is new? Increase in annual fees and reduction of credit card limit is not a new thing. Its been going on for as long as I can remember. Not all banks have a negative reaction on the bill and surely we can find banks and credit card companies who can offer us what we need. If we do not like our current credit card issuer then find another one. Let us not stress ourselves over this matter. We have options.

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