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.
Sunday, August 9, 2009
Subscribe to:
Post Comments (Atom)
Many investors have strong feelings about real estate either for or against. It's better to stay only in those markets that are liquid that are easy to understand and deal with, and that offer an attractive compromise between risk and reward.
ReplyDeleteI have been blogging about Chase Bank's policies for the past few months. Below are all research articles and links. Unfortunately these kind of issues don't get the same play as celebrities do on the internet.
ReplyDeleteOne thing I would point out, it is very important that the one trillion dollars in consumer debt decline. The problem is not the declining of the consumer debt, it is the ridiculous and dangers 20-30% interest rate charges that MOST of that debt has attached to it.
This is creating interest rate charges of between 15 billion to 25 billion dollars EVERY MONTH on OLD DEBT. That is money that could have gone to local economies if the credit card companies had created an incentive program that would allow customers to pay off OLD DEBT without any more interest rate charges.
It seems that somehow the government has created a paradigm where banks win by cutting off their customers, shame on our government for giving banks an easy way out.
VOTE FOR THE CONSUMER RIGHT TO OPT OUT WHEN A BANK CHANGES TERMS AFTER AN AGREEMENT IS ALREADY IN PLACE.
CONSUMERS to lose 100 MILLION to 1 BILLION DOLLARS A MONTH BECAUSE OF CHASE BANK'S RAISE IN THE MONTHLY MINIMUM PAYMENT ON LOW INTEREST CREDIT CARDS.
Daily-PROTEST.com
BLOGGERS AGAINST CHASE BANK.com
Chase BANK SUED FOR FREEZING HOME EQUITY LINES.
CREDIT CARD COMPANIES ME FIRST AGENDA IS CAUSING SOME STATES SERIOUS FINANCIAL LOSSES.
OVER ONE THOUSANDS LETTERS OF FEAR AND LOATHING AGAINST CHASE BANK IN LESS THAN 3 MONTHS AT CONSUMER AFFAIRS DOT ORG.
ChangeinTerms.com
Jamie Dimon's Competence Called into Question by John Kay.