If you want to boil down the past two years into a few sentences, it goes like this: Banks took on too much risk. When those risks backfired, banks conserved capital. When they conserved capital, lending decreased. As lending decreased, businesses had to cut back, laying off workers and canceling investment.

Less credit, more pain. That's the life of a country reliant on debt. So we should pay attention to what banks plan on doing with the single most important source of consumer credit -- credit cards -- in the months ahead. And I really do mean the single most important source. Last winter, bank analyst Meredith Whitney noted that credit cards are the top fallback source of consumer liquidity, second only to paychecks.

To see where credit cards might be heading, here's a summary from the Federal Reserve's recent Senior Loan Officer Opinion Survey on Bank Lending Practices report:

For prime borrowers, about 50 percent of [banks], on net, expected to increase interest rate spreads, reduce credit limits, and reduce the extent to which loans will be granted to customers who do not meet credit-scoring thresholds. On net, about 45 percent of banks also expected to raise minimum required credit scores and about 40 percent expected to raise annual fees for prime borrowers. Expectations for tightening various terms were relatively more common for loans to nonprime borrowers. For nonprime borrowers, about 75 percent of banks expected to increase interest rate spreads, and about 60 percent expected to reduce the extent to which loans will be granted to customers who do not meet credit-scoring thresholds and to reduce credit limits. In addition, about 55 percent and 45 percent of banks also expected to raise minimum required credit scores and to raise annual fees, respectively, for nonprime borrowers.

Less credit. Higher interest rates. More fees. Tighter standards. You can't blame banks for doing this -- credit card default rates are through the roof -- but it means those relying on credit cards, especially those with checkered credit histories, are going to have a very tough time maintaining reasonable credit lines.

Many of these changes are in response to credit card reform passed earlier this year. Most of the new regulations don't go into law until February, although Congress is racing to speed up the start date. Most banks still aren't compliant with impending regulatory changes, meaning most of the credit tightening probably hasn't been dealt yet.

You can also see how much further credit card lines may be slashed by comparing current outstanding lines to Whitney's estimate that 60% of all lines will be eliminated between the end of 2008 and the end of 2010:


Outstanding Credit Card Lines,
Q4 2008

Outstanding Credit Card Lines,
Q3 2009


Bank of America (NYSE:BAC)

$827 billion

$572 billion


Citigroup (NYSE:C)

$1 trillion

$815 billion


Discover Financial (NYSE:DFS)

$207 billion

$174 billion


JPMorgan Chase (NYSE:JPM)

$624 billion

$584 billion


If Whitney's right and 60% of all available credit will be eliminated, major banks still have a lot of credit lines to hack away at.  

Long term, that's a good thing. Too much credit was extended under too loose terms during the boom years. But if you ask me, there still seems to be a disconnect between the reliance on credit and economic shifts making credit less available.

For example, the savings rate has crept back up to about 3% to 4% lately -- still less than half its long-term average. If credit cards are consumers' second-most important source of liquidity, loan terms on those credit cards are being dramatically tightened, and unemployment is more than 10%, you'd expect the savings rate to go up radically. Yet despite the improvement from the negative savings we had in years past, a 3% savings rate is still remarkably low -- especially for an economy trying to heal itself from a debt binge. From the early 1950s until about the mid-1990s, you won't find a single period when the savings rate was remotely close to 3%. Eight percent, 9%, 10% was always the norm.

Bottom line: There are concrete signs that credit costs and availability are about to get a whole lot worse, yet it still feels like we live in a world where a safety net is defined as the number of American Express (NYSE:AXP), Visa (NYSE:V), or MasterCards (NYSE:MA) you hold in your wallet. I can't see how that'll end well, and it reiterates and underlines the difficulties still facing the American consumer.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. American Express and Discover Financial Services are Motley Fool Inside Value recommendations. The Fool has a disclosure policy.