The Death of Credit Cards

Remember the old saying, "Money isn't everything. There's also credit cards, money orders, and travelers checks." Go ahead and add that beauty to the graveyard of financial mottos that have been killed in the past year.

Meredith Whitney -- bank analyst extraordinaire -- predicts that the credit card industry may slash more than $2 trillion of existing credit lines -- 45% of the total -- over the next year and a half. Yikes! The obvious outcome here would be a huge risk reduction for companies that issue consumer credit, such as JPMorgan Chase (NYSE: JPM  ) , Bank of America (NYSE: BAC  ) , and Citigroup (NYSE: C  ) , while kicking an already-bloodied consumer -- and to a lesser extent, card processors Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) -- while they're down.

The big question is whether those consumers deserve to be kicked, with all due respect. Among the more disturbing tidbits Whitney mentions in her report is that credit cards serve as consumers' second most important source of "consumer liquidity," behind actual jobs. Why is it disturbing? In any healthy economy, you'd expect savings to be the closest backstop to job income, not credit cards.

One of the key reasons we're in such a bind right now is that consumers scoffed at saving for a rainy day, and instead spent like there'd be eternal sunshine. Sure, a 45% contraction in credit-card lines will be miserable for some, but the harsh reality going forward is that people will be restricted to purchasing things they can actually afford. I know -- it's a tough concept to grasp.

All of this highlights what I think is one of the biggest fallacies we're facing today: the notion that the key to an economic recovery is getting consumers back to previous spending levels, without realizing that those same levels of spending are partially what ushered in this mess. There's no way around it -- the key to a stabilized economy is to get people to spend less and save more. Unfortunately, that'll mean a reduction in the standard of living for those reliant on plastic to begin with, not to mention the economy as a whole, which is composed of roughly 70% consumer spending.

That said, R.I.P., credit cards. You won't be missed.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Fool has a disclosure policy


Read/Post Comments (6) | Recommend This Article (37)

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  • Report this Comment On December 01, 2008, at 3:44 PM, KareemE wrote:

    <q>Sure, a 45% contraction in credit-card lines will be miserable for some, but the harsh reality going forward is that people will be restricted to purchasing things they can actually afford.</q>

    To offer another opinion:

    "A full year's work at the minimum wage in 2007 yielded only one-quarter of the income need for the basic expenses – food, housing, transportation, health care and taxes – of a family of three, and only a little more than half the income needed to support a single adult with no children.

    Moreover, even at $8 an hour, California's minimum wage remains low by historical standards. When measured in inflation-adjusted dollars, this year's minimum wage increase only restores low-wage workers' purchasing power to its 2002 level. The purchasing power of California's new minimum wage is still 24.8 percent below its 1968 purchasing power."

    This is from the San Diego Tribune, an editorial by Jean Ross and Alissa Anderson Garcia, analysts at the California Budget Project. Perhaps the decline in earning power facing many Americans explains the proliferation of credit cards. People are dipping deeper and deeper into their pockets to cover basic necessities, not their personal extravagance.

  • Report this Comment On December 01, 2008, at 5:00 PM, TimothyVR wrote:

    I agree that a lower credit line will help to rein in profligate spending, but how will the reduction effect our credit ratings? That is a serious question - and a different issue.

  • Report this Comment On December 02, 2008, at 3:16 PM, Ladyfox7oaks wrote:

    I agree with KareemE, Most of the debt on my cards is what some are calling "Survival debt". It's the groceries, the gas, the emergency repairs to the car so I could continue to get to work, stuff like that. I'm getting a handle on it, but there's no way I could if I had even a cat to take care of, much less a family!

    While the idea of "Spend less, save more" is a fine idea and a worthy goal, it's not going to be possible for a lot of hard working folks. Others are going to get a really rude awakening to find out they have to move from their nice suburban home to a closet in an apartment complex, in order to continue putting food on the table.

    I think that to do it- we're going to have to have a radical restructuring of the economy and the mindset behind it. Take bread back to 75 cents a loaf, instead of 4 dollars- that sort of thing. Don't raise prices JUST because you can...

  • Report this Comment On December 05, 2008, at 10:00 AM, rughetta wrote:

    Although I agree with the situation that both Ladyfox7oaks and KareemE describe, I feel, as the article alludes, that the inflation of the prices of goods is largely due to the liberal spending of the US consumer. High demand (from credit-greased liquidity) leads to higher prices. Lower the availability of credit and prices should stabilize and even fall (witness what the credit crunch has done to housing prices and food prices have started to follow suit). Unfortunately, there is always a lag between the tightening of credit and the readjustment of prices so those people living right on the edge will surely suffer a lot of pain.

    Fortunately, this period of recession will pass. Unfortunately, we US consumers have a history of poor memories and repeatedly fail to learn from our experiences. To wit: since oil prices have recently receded, many people are buying more SUVs as if oil will always remain cheap. Well, back to saving for the next crash.

    CAVU,

    Rughetta

  • Report this Comment On December 06, 2008, at 1:11 PM, KareemE wrote:

    Rughetta,

    I am generally very frustrated with the tone Fool writers speak of common workers/consumers in the United States; you yourself lump 'US consumers' together and place much of the blame on them for "the inflation of the prices of goods". Except in our world, the people with the advanced college degrees aren't the everyday consumers, they're the ones running things. They sit on boards and committees that decide policy. They're the ones setting the prices of their products, offering credit, developing the practices or underdeveloping the oversight, ensuring the maximum profitability of their companies that got us in this mess. They're the bosses. To somehow invert it, that the objects of a system, everyday men, have somehow driven that system to oblivion is subterfuge at the least.

    Credit presented an immediate way to wrest every last dollar from the consumer; material culture has thrived on the heels of this cre-devolution; and the businesses that so many of you tout and fawn over are the main beneficiaries of this process. You want to know how to eliminate a need for credit? Give people more money. Avoid an economic system that incentivizes debt for others' profit. Develop company structures that incorporate the needs of the people.

    Stop making excuses for corporate profit. Stop shifting the blame. It's the person in the suit running things. Why are we hanging the US consumer?

  • Report this Comment On December 14, 2008, at 1:43 PM, CarenK wrote:

    Credit card companies have become more cautious; this does not mean credit is dead. Credit is still being extended, but consumers need to take a different approach if they need credit during these challenging economic times. For example a person who has a credit score in the good credit category should apply for a credit card in the average credit category.

    Consumers also need to make every effort to pay credit cards on time. One missed payment and a person could lose $1,000.00 of their credit limit. In addition having large amounts of debt will also subject someone to having their credit limit lowered. Credit card companies are looking for safer bets.

    Here is a tip that works: If your credit limit is lowered call your credit card company and ask for it back.

    Don't just talk to the first person on the phone, and accept their reason on why your limit was lowered and hang up. Ask to talk to the next person and the next until you talk to the person that actually can overturn the decision.

    If you have a good payment history with the issuer it is in their best interest to restore your full credit limit. Even if you missed one payment or you have a high rate of debt on your credit report, banks want to keep customers that earn them profits content. If you are proactive and challenge their decision there is a good chance this decision can be overturned.

    http://www.creditfast.com

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