Banks cut off 8 million credit cards in the month of February alone. This, in my opinion, is what led to the sharpest drop on record in credit card borrowing in the month of February, a year-over-year drop of 9.7% and $7.8 billion - the largest dollar drop in credit card borrowing on record since records began in 1968. In the 7 month period from July 2008 - February 2009, banks have reduced the overall number of open credit cards by 17%, and have also cut overall credit limits by 9% in that same time period. Why are banks doing this? Because 4.5 percent of total balances on bank-issued credit cards were at least 60 days past due in February, a 32.7 percent increase from a year earlier. This, just like mortgage delinquencies and foreclosures, is only going to get worse and worse as unemployment increases and/or workers’ hours get cut.
Meredith Whitney, in an interview on CNBC yesterday, said that we have already seen an accelleration in cuts to credit card lines by banks way beyond her expectations, in terms of how fast it has occurred. This from someone who is forecasting 57% of all credit card lines will be eventually cut out of the system by U.S. banks. She said that $500 billion of credit lines were cut in the fourth quarter alone. In her view, and I agree 100%, this is going to have an “underappreciated” impact on total U.S. commerce, jobs, consumer spending, and the broader economy.
Whitney could not be more right on the significance of credit cards. This is a crucial, crucial trend to keep a close eye on, as credit cards are the lifeblood of consumer spending, retail, restaurants, shopping malls, commercial real estate, and the overall economy, since 70% of the economy is consumer spending. American consumers use their credit cards everywhere and anywhere, regardless of if they are employed or not, for necessities such as groceries, gas and clothing, as well as for most luxuries such as electronics, etc. As the President of Equifax states, “”Their credit card is their lifeline”.
As Whitney has said before, everyone understands the significance of consumer spending in our economy. What everyone does NOT seem to understand is the significance of credit cards in that consumer spending, and thus our overall economy. If banks continue to freeze and close credit card accounts, along with reducing credit card lines (limits), this will have a devastating impact on our economy.
Here is the Whitney interview from yesterday: