The Credit Crunch: A Look at the Current Credit Card Fallout

Bailout or no bailout? More FDIC insurance or not? As the markets gyrate back and forth, and banks and other financial institutions go under or get gobbled up, it’s been a volatile time, to say the least. With credit tightening and banks reluctant to lend money, what does this mean for your credit cards?

Fewer subprime offers
Not surprisingly, the subprime and low-income segment has been hit the hardest by the credit crunch. According to market research firm Synovate, credit card mail volume decreased 12% year-over-year in Q2. Subprime and low-income customers accounted for much of this drop–while 66% of households with incomes under $50,000 received an offer in Q2 2007, only 52% received one in Q2 2008.

Lower limits and stricter standards for more customers
As has been widely reported, issuers are also looking to decrease their exposure by cutting back credit limits, even for customers with perfect payment histories. As part of its annual review of cardholder accounts, American Express typically reduces the limits for roughly 4% of its customers. For comparison, this year, Amex cut limits on about 10% of its customers.

And according to a July Federal Reserve Board survey of loan officers, about 65% of domestic banks indicated that they tightened their lending standards on credit card loans, up from about 30% in the April survey.

More fees
Fees are also on the increase, as issuers try to generate any income they can. The days of plentiful no fee balance transfers seem like a distant memory. Instead, credit card issuers have been steadily raising the caps on balance transfer fees. For instance, Chase used to charge a 3% fee, with a maximum of $75 or $99 to perform a balance transfer. Now, the fee is 3% with no cap on the maximum charged.

This is not to suggest the days of gloom and doom will remain forever. Interestingly, Capital One just decided to lower the interest rate on a number of its cards and reintroduce an intro 0% offer on purchases for 12 months which it had pulled earlier in the year. The move could signal some increased confidence in the immediate future of the credit market, or perhaps is just a calculated risk to steal market share.