The legislation President Obama is about to sign, overhauling the credit card industry, may indeed cut off access to credit as many issuers warn.
But that would not be a big change.
Issuers have been cutting back on credit for at least nine months — and customers are using their cards less.
"The biggest single force pushing down on credit right now is weak demand, both in housing and consumption," said Dean Maki, an economist at Barclays PLC.
Consumers who have lost their jobs have less money to spend and are defaulting on current debt more rapidly. This trend is only likely to worsen as unemployment continues to rise this year.
Lower spending and rising defaults, coupled with the now-realized prospect of regulatory reform, have driven issuers to pull back, too.
The country's three biggest credit card lenders, Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co., cut unused lines by almost one-quarter, to about $2 trillion, during the six months that ended March 31.
At a seasonally adjusted $945.9 billion in March, according to Federal Reserve Board data, credit card debt was just a fraction of overall consumer borrowing. The amount owed on installment loans for things like cars and education is about 70% larger, and mortgage borrowing is about 12 times as much.
Revolving consumer credit declined 1.2%, year-over-year, in March, the most recent month for which data is available, after a 0.01% year-over-year decline in February.
Month-over-month declines have occurred in previous recessions and, more recently, during years of easy lending against home equity. But February and March showed the first year-over-year declines since the Fed began reporting the data four decades ago.
Though lenders continued to cut credit card lines, raise prices and tighten underwriting, personal consumption rebounded in the first quarter, growing at an annual rate of 2.2%, according to preliminary estimates by the Commerce Department, after contracting at a rate of 4.3% in the fourth quarter and 3.8% in the third quarter.
"There are some people you might call 'otherwise credit constrained' who are really dependent on that extra credit card line, and there are other consumers who aren't," said Nicholas Souleles, a finance professor at the University of Pennsylvania's Wharton School. "There is evidence that the constrained guys, that when their limits go up, their spending goes up. Conversely, I think it would follow that a decline in their limit would reduce their ability to spend."
In its "Global Financial Stability Report" last month, the International Monetary Fund said, "At the start of the crisis, U.S. households borrowed more heavily on credit cards and other forms of consumer credit as other credit channels began to close. That trend has since ceased … as the financial condition of consumers has weakened sharply."
The IMF said that "supply-side constraints predominate" — lower debt at lower rates would suggest that lower demand is the principal force, but lower debt at higher rates, as at present, suggests the opposite.
Some observers have argued that competition for prime customers has left many with idle cards, which may mitigate the potential impact of tighter credit.
Unused lines at JPMorgan Chase actually grew 3% in the first quarter, but its 20.5% decline in the fourth quarter far outstripped reductions at Bank of America Corp. and Citigroup Inc. during the period.
JPMorgan Chase bought a large card operation with Washington Mutual Inc.'s banking operations in September and said it planned to let about half the portfolio run off.
A spokesman said JPMorgan Chase's first-quarter increase was the result of customers' paying off balances after the holidays, freeing up line capacity. (A $14.2 billion decline in receivables at JPMorgan Chase compared with an $18.8 billion increase in unused credit lines.)
Data from SNL Financial LC showed that consumers have on average about $32,900 in reserve capacity on their credit cards, based on $3.7 trillion of unused bank lines at yearend.
This compares to an average of about $8,600 of debt carried, according to Fed data.
Srini Venkateswaran, a partner in the management consulting firm A.T. Kearney, said that issuers, by pulling back, are trying to defend against customers who may be heading toward bankruptcy and are "maxing out" their unused credit card lines.
If a cardholder starts using a dormant line, Leigh Allen, a consultant at Global Consumer Finance Advisory LLC, said the issuer "should be worried. You've got to get him before he gets you."
Ultimately, Allen said, much rests on the final impact of the new law to control credit card practices. If lenders "decide that they're not going to be able to reprice people effectively … they'll slam on the brakes," he said.