How Much Credit Is Actually Being Cut?

I’ve talked about credit lines being cut recently, as it’s all the rage right now, so it seems appropriate to take a closer look at some figures.

Meredith Whitney, a CIBC analyst who has been branded the pessimist among financial analysts for a long time now (despite being more on point than her colleagues), wrote an interesting piece in the WSJ yesterday.

She said there is currently about $5 trillion in credit card lines outstanding in the United States, with a little more than $800 billion drawn upon.

Six months ago, she estimated at least $2 trillion in available credit card lines would be “expunged from the system by the end of 2010,” but now calls that figure optimistic.

In the fourth quarter alone, credit card issuers reduced credit lines by nearly $500 billion as credit card default panic ensued, so Whitney’s new estimate lies above $2 trillion in just this year alone.

By the end of 2010, that figure will rise to a startling $2.7 trillion, meaning a lot less spending power for U.S consumers and a good chance you may get hit.

This is a problem, because what she sees as a minimum 57% contraction in credit card lines will clearly dent consumer confidence and put some undeserving, creditworthy borrowers in a tough spot if they need a little extra liquidity.

Note that 90% of credit card holders carry a balance (don’t pay it off in full) at least once a year, and over 45% of credit-card users carry a balance every month.

That said, credit card issuers may be going too far with their risk mitigation efforts, illustrated by the fact that credit card lines are being cut across entire zip codes where home price deprecation is especially bad.

Whitney also pointed out that credit card issuers are hurting one another but cutting or closing credit lines, thereby increasing the risk of default on the few remaining open lines.

But credit was extended too freely, and must be retracted; ideally issuers do it in an organized fashion or this crisis will persist that much longer.

(photo: loopoh)

Related Topics:

1. Cut Credit Lines Don’t Really Lower Credit Scores
2. Credit Card Defaults and Charge-Offs Rise
3. 20 Million Credit Cards Were Closed Last Month
4. Chase to Issue Fewer Credit Cards Thanks to New Rules
5. How a Cut Credit Line Can Lead to an Over-the-Limit Fee