Closing Consumer Credit Card Limits

Closing Consumer Credit Card Limits
This is a concept that fascinates me. Some banks are closing credit card limits for seemingly no apparent reason other than they want to do so before the federal laws change next year. It looks like a last ditch attempt to do things that the legislation will prohibit.

Full and fair disclosure: I had two credit card accounts that had their limits reduced by JPMorgan Chase Bank from USD$15,000 to USD$500. It is true that I had not used the credit cards in years. Like many older Americans, I liked to carry them for sentimental reasons. The old Chase Manhattan Bank helped my parents get inheritance money out of Great Britain in 1940 at the start of World War II.

A small limit like that is not going too much for me if I want to make a purchase of any consequence. I could purchase a bunch of DVDs or even some Blu-Ray DVDs at DVDPlanet.com. $500 would about cover dinner for my son and me and maybe our friends who are female at Morton’s the Steakhouse.

My point is this; how likely am I to do any business with JPMorgan Chase Bank in the foreseeable future?

I think the chances are very slim to less than zero that I will.

I wonder how other Americans like me were treated to, for all intents, the closure of their credit card accounts. I would be willing to bet that a great number of them will never do business with the bank or financial institution that unilaterally reduced their credit limits without reasonable cause.

Most of them are or were profitable customers.

I have very good credit and have had very good credit for years. I am customer that I loved to have when I managed a credit card portfolio. I carried a balance from time to time but not an excessive balance. I paid more than the minimum payment each month and I made sure the payments were timely.

In other words, I was a very profitable customer.

Profits, as you know, are important for any business and banks are no different. Profits help build capital in a financial institution. Consumers tend to be among the more profitable business segments that a bank has. They are not usually sensitive to interest rate changes.

I don’t think there have been any bank fail because their consumer loan business was crummy. I could be wrong because so many banks have failed and will fail in the coming months. The most recent bank failures in Southern California were attributed to failed loans in the commercial real estate market.

I read in the New York Times Deal Book this past week the Federal Reserve reported a USD$10 billion drop I consumer credit outstanding. This was the fifth consecutive month for a decline in outstanding consumer credit.

Fascinating actually.

I think one could reasonably conclude that American consumers were truly cutting back on the use of credit. If this happens, as the New York Times pointed, the current recession will last longer because consumer spending is roughly 70% of Gross Domestic Product.

I have been cutting back on my credit balances and I have put off expensive purchases that no longer seem to make any sense to me. For example, I thought about getting in on the cash for clunkers program but decided to keep my clunker because it is paid for and I have only driven it for less than 90,000 in fourteen years. Having money in the credit union or the bank is a very nice feeling for me.

With American consumers cutting back on their use of credit, this will reduce bank earnings. Less debt means less interest paid to the banks.

Banks and other financial institutions have competed very strongly with each other for commercial real estate loans in the last five or six years. Competition is very good for borrowers because they are able to borrow at a lower cost. Thin margins, caused by very competitively priced commercial real estate loans, meant there was not much money going into the institution’s profits.

I will admit there is some logic to the banks’ actions. Decreasing the amount of available credit reduces the banks’ contingent liability to fund these future advances. This helps to improve their balance sheets, something the regulators have been pushing at for some time now.


Be well and stay happy.