Bankruptcy

Credit Card Line Reductions and Eliminations

By Adam Levitin

In the coming months and years we are likely to hear the banking industry and its supporters blame the Credit CARD Act for reductions in consumer credit availability.  That might end up being the case, but we should be skeptical of the claim (and of the magnitude asserted) until we see some data that supports such a finding.  The fact of the matter is that there is already a tremendous credit contraction going on in the credit card space.  The chart using data from Carddata.com shows the annualized rate at which card issuers are closing down accounts at their own initiative.  As of April, it was 19.01% (I understand that to mean that in April about 1.6% (=.19/12) of all accounts were closed).  Remember, this is account closings, not credit line reductions, which are occuring on top of the account closings. 

In other words, a fair conclusion is that even without the legislation, we'd be seeing credit lines cut and eliminated right and left.  That means it just won't do to rest on priors and fall back on the syllogism of more regulation means more costs means less credit available.  To be fair, there could be an anticipatory effect showing up in the account attrition data.  But the legislation doesn't start to go into effect until late August, and a lot of it doesn't go into effect until 2010.  So a profit maximizing issuer would probably want to close the accounts that are profitable under current law, but not under the new law on the day before the legislation goes into effect, rather than a few months ahead.

Full post as published by Credit Slips on June 05, 2009 (boomark / email).