In the past month current and former industry executives and observers have raised concerns that prevalent risk management tactics may spur such behavior — even among customers who still have the capacity to pay.
For example, some observers said aggressive repricing could lead to a spike in "bust-outs" — when cardholders decide to run up as large a balance as possible before abandoning the account. In the past, bust-outs have typically been perpetrated by fraudsters who always planned to default, but they may soon become more common among regular consumers who obtained their cards in earnest, these observers said.
One way to prevent this from happening is by reducing credit limits, but that also can have unintended consequences.
"The question always happens, and it happened in the crisis of '92, '93 … if you're having to reduce people's credit lines, does that give them more incentive to pay, or less?" said James L. Bailey, a former Citigroup Inc. executive who ran its North American consumer banking and credit card business in the 1980s and '90s. Cardholders whose credit limits are cut down to their existing balances may decide that their card bill is no longer a priority for payment, "because that card has no utility for me anymore," said Mr. Bailey, who is retired.
When compared to home or car loans, or to other household expenses, a card with no purchasing power ranks especially low in a consumer's "payment hierarchy," he said.
Cards have long stood at or near the bottom of that hierarchy, but in recent years they have gained more importance — as long as they could be used.
In an October survey of 1,000 households that the Internet bill-payment company Online Resources Corp. released this month, about a third of the delinquent consumers polled said they continued to use their cards even after falling behind on payments. If they did not have enough money to cover all of their household expenses, about 26% of consumers said they would most likely skip their credit card bill, a drop of 8 percentage points from a year earlier. About 2%, roughly the same as last year, said they would skip the mortgage first.
Credit line reductions and interest rate increases can negatively affect the behavior of customers who may be current on at least one card, said Rick Wittwer, who oversaw collections and recoveries as an executive vice president for Washington Mutual Inc.'s cards unit and as an executive for Providian Financial Corp., which Wamu bought in 2005.
"You'll reduce the credit line to the balance that they have, so it becomes a useless card at that point," said Mr. Wittwer, now a managing partner in Virtual Point Capital Corp., a distressed-asset fund specializing in consumer loans. As a result, the cardholder decides, " 'If I can't use it, then I'm not going to pay it.' What it does is, it pushes them into delinquency when they weren't there before."
Issuers like American Express Co. and Citi have said they are raising interest rates by 2 to 3 percentage points.
This month regulators adopted rules that will restrict issuers from raising interest rates on existing accounts unless a customer is 30 days or more delinquent. The rules will not go into effect until July 1, 2010, and some industry representatives and analysts have said the prospect of tighter regulation helped prompt issuers' recent rate hikes.
