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Consumer Credit Continues To Shrink

Banks close off the money flow as losses rise

By Mark Huffman
ConsumerAffairs.com

August 10, 2009

With banks maintaining tighter lending standards, wages holding steady and home values still going down, economists say consumer spending will likely remain soft in the months ahead. That means that, despite recent encouraging signs in the economy, it may take some time to recover from the recession.

About half the decline in consumer credit came in the area of revolving credit, like credit cards. That category was down $5.25 billion in June for the 10th straight month.

A number of banks -- JP Morgan Chase in particular -- have lowered customers' credit limits, or closed accounts completely. Over the summer many former Washington Mutual cardholders were told their accounts were being closed because of negative information from one of the credit reporting agencies.

Sylvia, of Matteson, Illinois, is a former Washington Mutual cardholders with a $7,500 credit line and almost no balance.

"I received a letter from Chase on 8/4/09 stating that because of my "Experian Credit Report" Chase has reduced my line of credit from $7500 to $3900," she told ConsumerAffairs.com. "My credit has not changed, in fact, it is much stronger. My current credit score is in the 700s. How can they be allowed to risk our credit scores?"

Though upsetting to their customers, banks say their aggressive moves on credit cards are simply self-preservation. Credit card defaults climbed to a record in June, according to Fitch Ratings Statistics. Charge-offs totaled 10.79 percent of loan portfolios last month, up more than 60 percent over July 2008.

Meanwhile, with shrinking credit adding to other recession-related contractions, consumer spending continues to fall. Spending is off 1.2 percent in the second quarter and is down two percent since peaking at the end of 2007, when the recession officially started.

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