Credit Card Firms Tug On Customers' Leashes

(MoneyWatch)  The ubiquitous credit card industry is getting squeezed by the country's economic pinch.

Purveyors of plastic are tightening lending standards by lowering borrowing limits, raising interest rates, discouraging rolling over balances and boosting fee penalties on late payments.

They're also diligently monitoring customer credit ratings, while trimming efforts to lure new accounts via direct mail. And card holders with FICO scores falling below "excellent" may have their credit lines capped, interest rates raised or lose charging privileges.

Credit card providers American Express, Discover, Visa and MasterCard, are scaling back, as are giant credit card issuing banks including Bank of America and JP Morgan Chase.

Among those expected to feel the credit card crackdown: small business owners. An estimated 44 percent of them use credit cards to keep their companies up and running, reports a recent survey by the National Small Business Association. Entrepreneurs are relying more on plastic as banks make fewer conventional business loans.

Why are credit card companies raising the lending ante? They're scared.
Credit card charge-offs could peak at 10 percent in the third quarter and the industry is looking at nearly $18 billion in writedowns by the first quarter of 2009, according to Strategic Value Advisors, which recently released a report entitled "Credit Cards at a Tipping Point".

The strain is showing on an industry that's already under fire from federal lawmakers seeking greater regulation.
For example, Bank of America's third quarter credit card-related charge offs increased to $1.24 billion, representing a net charge off rate of 6.14 percent. Losses rose to $3 billion, representing a loss rate of 6.40 percent.
On top of keeping a closer eye on existing customer accounts, credit card companies are also scaling back on providing new plastic in economically-strapped states such as California and Florida, which are reeling from the subprime mortgage crisis.

Credit cards companies are even doing what was once unthinkable: They're cutting back on direct mass mailings and other marketing incentives aimed at luring new customers. The volume of direct mailings declined earlier this year by 8 percent, compared to 2007.
But don't worry. Even at the lower rate, there's still nearly two billion pieces of credit card correspondence clogging up the nation's mail boxes.