NEW YORK – 2008 may be remembered as the year consumers – including some credit union members – turned over their keys not just to automobiles but also to houses and condos.
Now some analysts are suggesting that credit line reductions, account repricing, and other steps that card issuers are taking to control risk soon could start causing their card holders to walk away again: this time from their credit cards. Among the issues, said analysts, is that prevalent risk-management tactics may spur such behavior – even among customers who still have the capacity to pay. 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. 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?" James L. Bailey, a former Citigroup Inc. executive who ran its North American consumer banking and credit card business in the 1980s and '90s, told American Banker, an affiliate of Credit Union Journal. 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 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 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.
