Thursday, March 12
Posted 2 p.m.
Bankrate reporter Leslie McFadden contributed this entry.
A few months ago, Oppenheimer & Co. banking analyst Meredith Whitney made a bleak prediction. Credit card issuers would cut credit limits by $2 trillion over the next 18 months.
Whitney, who now has her own advisory firm, revised her prediction this week. In an opinion piece in the Wall Street Journal, she called her previous estimate "optimistic," considering that banks cut $500 billion in credit limits in the fourth quarter of 2008. Her new forecast: that issuers will sever more than $2 trillion in credit limits by year's end, and $2.7 trillion total by the close of 2010.
Should her prediction come true, consumers would do well now to funnel money into their emergency fund and pay down balances. While you can't prevent issuers from trimming credit limits, the last thing you want is a high balance that will only look higher if your credit limit is reduced. The high utilization will damage your credit score, possibly triggering a domino effect, where other issuers respond by also lowering your limit.
To that end, she says lenders are playing "hot potato," where "no one wants to be the last one holding an open credit-card line to an individual or business." Risk increases for the remaining lenders as some cut back lines.
Another take-away from her article is that those sock-drawer cards you're saving for an emergency may not be so useful if the limits get slashed or the cards get cancelled. To keep the accounts active, use them at least once a quarter and pay them off immediately.
Whitney also contended that the Unfair and Deceptive Practices Act regulations, set to take effect July 2010, would limit access to credit cards. Issuers will be less willing to lend if they can't adjust the terms of the account according to changing risk. My story "New credit card rules have downside" discusses the negative consequences for cardholders.
Bankrate's Senior Financial Analyst Greg McBride expects to see more issuers switching fixed-rate cards to variable rate as the 2010 deadline approaches. The rules would restrict rate hikes on existing balances unless the cardholder is at least 30 days delinquent, hurting the profitability of fixed-rate cards. Variable rates could still rise with index-related increases, making them the better money maker for issuers. Coupled with the fact that issuers like to position themselves for future Federal Reserve rate hikes, McBride believes "we'll see issuers increasingly move away from fixed-rate cards, more so than we've seen in the past."
Among the 50 largest issuers surveyed by Bankrate, currently about 66 percent of the credit card offers are variable rate, he says.
If you have a good FICO score and not so great credit card APRs, remember you still have options. Compare credit card offers on Bankrate and evaluate the cost of moving your debt when transferring balances.
Comments? Questions? E-mail Plastic_Rap@Bankrate.com.