November 19, 2008
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News: Will Stemming Credit Hurt Economy?
With the credit card industry's latest moves to stem losses, the risk of making things worse is called into question. In an effort to stave off recent losses, issuing banks have resolved to raise finance charges, lower credit limits, raise penalty fees, un-cap Transfer Balance fees and raise qualifications to open new credit card accounts. They will, undoubtedly lose customers. But, they will also reduce bad-debt loss (charge-backs) and raise some revenues from the higher interest. The question is: Will these benefits outweigh the losses incurred by the losing desirable credit card consumers and the increased debt-loss caused by the higher finance charges? An even larger question might be: How will this effect the struggling economy?
Even if they do make all the right moves, we are still looking at a hard winter. As Kenneth Lewis puts it "We, as an industry, may end up with possibly the highest credit card losses the industry has ever experienced." Mr. Lewis is the Chief Executive of our nation's largest bank and the second largest credit card issuing bank, Bank of America Corp. The whole reason the U.S. Treasury Department awarded all those hundreds of billions of taxpayer dollars to these banks was to boost lending and thaw out the credit markets. Not just to strengthen the bank's balance sheets.
The intent was clear. That is why American Express Co offered to become a bank holding company. To apply the government funding toward keeping the credit card industry moving. Not to hoard the money and cut back on customers. Although, it appears that the banks starting to open up more in lending to other banks, they don't appear to be extending that to the consumers.
Just when consumers need it the most; they're strapped for cash, losing their homes and their incomes, the banks are closing them out also. Not just the hard-pressed, either. Even the less-risky wealthy and ‘well-behaved' are being cut back. The strategy is dangerous. The economy is struggling in so many ways but one of the worst ways is ‘Consumer Confidence'. No wonder. An economy can't survive without that. For an economy to recover, we must have spending (though not irresponsibly). To boot, the credit card industry stands to lose a lot of desirable customers.