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Beware collateral damage in credit card crunch

Post by Kim Bradford on Oct. 30, 2008 at 8:50 pm with No Comments »
October 30, 2008 8:50 pm

This editorial will appear in tomorrow’s print edition.

Borrowers who use plastic responsibly shouldn’t suffer blows to their credit scores because banks are scrambling to limit losses.

Welcome to the U.S. Financial Crisis: Credit Card Edition.

Banks, already battered by bad mortgages, are now bracing for more bad news as squeezed consumers default on their credit cards. They are pulling back on new credit offers and putting stricter limits on existing accounts.

Tighter reins on the supply of plastic money are long overdue. But as banks pull back, responsible borrowers deserve some shelter from the fallout.

Lenders have reason to panic. Americans carry more credit card debt than Congress agreed to spend on its Wall Street bailout package last month. Banks already have written off an estimated $21 billion in bad credit this year and could lose twice that between now and 2010.

The nation’s nearly $1 trillion credit-card balance pales in comparison to the amount owed on U.S. mortgages. But credit card debt is riskier. When a customer can’t pay his Visa bill, there is no property for the bank to sell to recoup some of its losses.

It will only get worse as credit dries up and unemployment continues to rise.

Consumers who have been buying goodies with money they don’t have will no longer be able to buy themselves more time by tapping home equity or transferring old balances to a new card. Meanwhile, families living on the margins could lose the battle to wean themselves from credit as companies lay off workers and cut hours.

Against that backdrop, banks are trying every trick in the book to reduce their risk and even good customers are feeling the pinch.

A borrower might see his credit limit slashed for no other reason than he lives in an area with a high rate of home foreclosures or he works in a industry wracked by layoffs. Cardholders who never carry a balance are getting notices that they better ring up some charges or risk a closed account.

Some of what the banks are doing might prove a healthy wake-up call for the American economy, which has become far too dependent on sky-high credit limits and credit card offers by the dozens.

The problem is that lower credit limits and canceled credit cards affect borrowers’ credit scores, which in turn could hobble responsible borrowers’ ability to get low-interest loans. Those are the very borrowers that banks need more of, not less.

Regulators and lawmakers should ensure that the nation’s credit agencies hold harmless prudent consumers who see their accounts closed or credit limits rolled back through no fault of their own.

Responsible borrowers shouldn’t have to pay twice for the reckless era of easy credit that the banks themselves helped spawn.

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