Credit Cards, the next economic crisis

Last week, the US Federal Reserve cut interest rates by half a percentage point to 1 per cent. That does not mean rate of interest will be reduced on your credit card. In fact the rate of interest you pay on your credit card is not expected to go down any time soon, if ever. The nation’s economic crisis is just in its infancy. We have a long way to go and it appears that different sectors of the economy will have their turn in the negative spotlight. First came the mortgage crisis. The nation is still sorting out that huge mess. Now, the New York Times is reporting that a credit card crisis is on the way. As Eric Dash wrote in Wednesday’s edition
After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.
The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.
Faced with sobering conditions, companies that issue Master Card, Visa, and other cards are rushing to reduce the bleeding, even as options once easily tapped by borrowers to pay off credit card obligations, like home equity lines or the ability to transfer balances to a new card, dry up.
Big lenders — like American Express, Bank of America, Citigroup and even the retailer Target — have begun tightening standards for applicants and are culling their portfolios of the riskiest customers. Capitol One, another big issuer, for example, has aggressively shut down inactive accounts and reduced customer credit lines.
Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries.
While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans.
The depth of the financial crisis has shocked our credit-hooked nation into rethinking its habits. Many families once content to buy now and pay later are eager to trim their reliance on credit cards. We have relied on credit cards too long. Many are learning a painful lesson; a lesson we need should have considered a long time ago. Get rid of the plastic and stay with the cast.