August 24, 2009

• Ducking doesn't help when they're breaking your legs, Pt.1
    How serious is it?

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  Were these 58 million consumers bad people? Did they abuse their credit cards? Very few, according to AP's report. In about 73% of the cases, these cuts weren't associated with any derogatory reports against the credit card holders. Many were simply targets because the credit cards were never used at all.

  Not all the people were substantially hurt by the credit-limit cutbacks. The AP estimates that only about a third of the credit card holders were hurt by lowered credit limits. Still, that's some 19 million credit card accounts. A significant population did feel the pain. If their utilization ratio was driven much over 30%, almost certainly their FICO rating was lowered.

  As long as the utilization ratio isn't driven over 30%, the damage is contained. A person's FICO score isn't damaged to the point where a person can't simply apply for another credit card with more favorable terms. Competition is essential in a free market system and credit card users need the ability to shop around to keep the industry honest.

  These are unusual times and there's somewhat of a paradox to resolve here. Because of such a tenuous employment situation in the country, credit card lenders must reduce their risk exposure. Even honest and responsible people can lose their jobs without warning. With a high debt-load, many will have to default on their debts. While no one knows who'll be next, it is known that being a responsible borrower doesn't mean that you'll still have a job next week.

  So, the credit card lending institutions are having to resort to "out-of-box" techniques and look at things like a person's postal zipcode. This technique, while seeming unfair, has proven to be fairly relieable. We're less concerned today with "intent to repay" than we are with "ability to repay". The greater risk is not personal, it's statistical.

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