Even with new credit card laws 2010, Americans are cutting back on credit

New laws are shielding American credit-card users – as long as they can get credit.

Sarah Beth Glicksteen / The Christian Science Monitor / File
Aja Jackson, of Quincy, Mass., cut up her last credit card about two years ago and now only pays using cash and debit. Just as new credit-card laws offer consumers new protections, the recession is causing them to cut back on their use.

After Monday's new credit card laws take effect, card issuers can no longer jack up interest rates on existing balances, for example. But those balances have been plunging over the past year.

It’s a sign that, although the new law may be a win for consumers, it comes as the amount of credit available appears to be shrinking.

“At some point purse strings will loosen a bit on credit,” says Greg McBride, a senior financial analyst at Bankrate.com, which tracks borrowing options for consumers. “But the qualification standards have changed.”

The tightening of credit is something that typically accompanies recessions, he notes. And a return to some of the lax lending standards that existed before the recession would not be good for borrowers or banks.

At the same time, however, the contraction of credit in the past two years has been unusually severe. Many economists say the strength of an economic recovery will depend on how fast credit starts to flow in a normal way.

Consider this: Until the past year, the amount of revolving consumer credit (essentially credit cards) has risen for three decades through thick and thin. Even in the recessions of 1981, 1991, and 2001, the trend stayed positive, according to Federal Reserve data plotted by averaging the most recent three months and comparing them to the same period a year earlier. But for the recession that began in 2007, this number has dived below zero into outright decline. The most recent plot on the chart, from Wells Fargo Securities, shows revolving credit declining at nearly a 10 percent annual rate.

The decline has several causes. Some borrowers are moving to pare their debt load, while others defaulted on their debt because of a job loss. Banks, facing a surge in delinquent loans, scrambled to reduce their risks by closing down credit accounts or imposing tighter limits on borrowing.

Banks also knew that curbs on some of their fee and billing practices – the law that went into effect this week – were on the way. That Credit Card Accountability, Responsibility, and Disclosure (CARD) Act is prompting card issuers to rethink their business models, even as they’re also dealing with recession-related losses. The law is forcing banks to reduce some fees, but some reports [link to tracey's second piece] show they have begun to boost other fees or add new ones.

“Probably because of the act, they are a little more cautious” about new card lending, says Yasmine Kamaruddin, an economist at Wells Fargo Securities in Charlotte, N.C.

As card issuers have tried to cut exposure to various risks, the number of Visa, MasterCard, and American Express cards in circulation dropped 15 percent in 2009, according to the Associated Press. Banks have also lowered the credit limits for millions of accounts.

When will credit conditions improve?

Perhaps it will start happening soon. But so far, numbers gathered by the Federal Deposit Insurance Corp. show that banks still confront a worrisome level of bad loans, although the problem may be peaking.

In the third quarter of 2009, some 3.4 percent of all credit card loans were "noncurrent," according to the FDIC data. That's much worse than the bad-loan level at the start of 2009 (2.8 percent) or two years before (1.9 percent). But it was better than in the second quarter of last year, when 3.6 percent of credit card loans were noncurrent.

“Stability will go a long way toward freeing up credit,” says Mr. McBride in North Palm Beach, Fla. “Stability in terms of the economy, and in loan defaults.”

Just as new credit card laws in 2010 give consumers added protection, the 'great recession' is forcing them to cut back on their use. Have you cut back on your credit-card use? Let us know on Twitter @CSMecon.

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