The Financial Crisis and Credit Cards

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When is there ever good news about credit cards? The perils of plastic have driven many people deep into debt. But at the same time, they've provided good long-term earnings for investors in many companies that issue cards, such as Capital One (NYSE: COF), JPMorgan Chase (NYSE: JPM), and Citigroup (NYSE: C).

The credit card arena is changing these days, though. There's a reason why the trouble we're going through on Wall Street is being called the credit squeeze -- big corporations and individual charge-card users will both feel the pinch.

As Bill Hardekopf, CEO of LowCards.com, has noted, there are two key likely developments for credit card users. First, lenders will be stingier with credit (as is reportedly already happening). To get the best interest rates on their cards, consumers will need excellent credit scores. (Lenders are suddenly a little more concerned with taking on riskier borrowers.) Credit limits will also be lowered now and then.

What does this mean for investors, whether in banks that issue cards or in the card companies themselves? A lot depends on those companies' credit exposure. Companies like Visa (NYSE: V) and MasterCard (NYSE: MA) bear no credit risk, but if transaction volumes fall, their profits could suffer. Meanwhile, companies that do extend credit directly, such as Discover Financial Services (NYSE: DFS) and American Express (NYSE: AXP), can expect dollars to be a little harder to come by. They may end up doing less business, but at least it'll be of a higher quality, with less money lent to riskier borrowers.

There may also be a ripple effect to retailers and other areas of the economy. Many consumers may rein in their spending in a shaky economy; others may not, and as they approach their credit limits and their rates get hiked, they'll end up in credit death spirals. As you look for investments for the months and years ahead, keep that double-edged sword in mind.