Last month, I showed how massive cuts in idle consumer credit lines could equal hell for credit card processors like Visa (NYSE:V) and MasterCard (NYSE:MA).

Turns out, the problem might be bigger than I thought.

The Federal Reserve released its monthly report on consumer credit, and it ain't pretty. Revolving credit balances fell 9.7% in February -- the largest decline in 31 years.

This creates a two-pronged battle sucking the life out of the credit card industry:

  • Credit issuers like Citigroup (NYSE:C), Bank of America (NYSE:BAC), and JPMorgan Chase (NYSE:JPM) are drastically slashing open lines of credit and jacking up interest rates on existing balances. In the fourth quarter alone, $500 billion of credit-card ammo was yanked away from consumers.
  • Consumers themselves are ditching credit cards like their lives depend on it. With the personal savings rate blowing up and the specter of unemployment on nearly everyone's mind, there's a mass exodus from consumer credit like we haven't seen in 31 years.

Now, for the American consumer and the economy as a whole, this is about as good as it gets. Higher savings and less debt is exactly what we need to move our economy from Neverland to reality.

But for card giants -- particularly Visa and MasterCard, which still trade at premium multiples -- we're looking an industry that's unrecognizable from even a few months ago. The boom in plastic transactions that propelled card processors to glorious heights is quickly losing a core segment -- credit. Heck, American Express (NYSE:AXP) has even offered to pay some customers $300 to close their accounts.

While card processors are far from hurting, that isn't the kind of behavior you'd like to see from an industry with double-digit growth expectations baked into its share prices.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. American Express is a Motley Fool Inside Value pick. The Fool owns shares of American Express. The Motley Fool is investors writing for investors.