Misery Loves Company: Credit Card Industry the Next Shoe to Drop

The decimated home mortgage market has crippled Wall Street and brought our government to its knees.  Unfortunately, the party isn't over.  Credit cards will likely be the next financial tool to feel the wrath of the global credit crunch.  

The towering amount of bad mortgage debt in the United States has created a global economic meltdown.  With an increasing number of homeowners defaulting on mortgages, fearful banks are tightening their credit lines.  For people who carry a large amount of consumer debt, this will have a profound impact in the months ahead.  Expect credit card delinquencies to rise, as lenders tighten their standards and shrink credit limits.

Credit cards are next

The subprime mortgage fiasco is like a brush fire in the middle of the desert.  It's spreading quickly, and in multiple directions.  Wall Street continues to lick its wounds, and credit card companies anticipate that the fire will soon head in their direction.

These companies are bracing for delinquencies on the plastic that they issue to rise by 7 percent in the first quarter of 2009, the highest increase in 20 years.  In anticipation of bad times, they've already begun shrinking credit limits, which is exceptionally bad news for people struggling with consumer debt.

Where to turn

Credit cards have served as the last bastion for consumers.  Prior to the mortgage meltdown, homeowners often relied on their mortgages if they needed to pay off excessive debt.  A home equity loan or line of credit could always be counted on to pay off bills, or even consolidate credit cards.

However, now that banks have tightened their lending standards, and the value of home mortgages has slipped, people are more consistently using their plastic as a source of cash.  The fallout from this new financial behavior could be devastating.  Already, credit card lenders are increasing interest rates on their cards, and levying extra fees for late payments.

Lower credit scores, less transfers

Consumers will no longer have the chance to abuse their plastic.  In the past, if credit card holders couldn't pay off their balances, they took advantage of 0 percent interest balance transfers that were offered by other companies, and moved all their debt to another card.  

Consumers who exhibited this kind of reckless money management are about to experience the same fate as the homeowners who chronically refinanced their subprime home mortgages.  With credit card delinquencies growing, issuers have begun to eliminate balance transfer deals.  They're also lowering credit limits, a move that will stymie people's attempts to access cash.

The reactionary moves made by credit card companies to weather the financial storm are understandable.  Fear is running rampant in the financial markets, and companies need to take drastic steps to preserve their solvency.  However, a return to more conservative lending principals should have taken place five or 10 years earlier.  The move may have slowed economic growth in the past, but at least it would have mitigated our problems in the present.