When Good Credit Goes Bad

This post first appeared on Minyanville.

An impeccable credit score was once a source of pride for bill-paying, fiscally responsible Americans. Now, as card issuers slash lines, up minimum payment requirements and raise interest rates seemingly at random, a stellar credit rating is rare indeed.

Besieged by mounting losses on all types of consumer debt, banks and credit-card companies are scaling back: According to Bloomberg, 45% of all US banks reduced credit card limits for new or existing customers in 2008's fourth quarter.

Issuers are attacking the problem in various ways, but the net effect is the same: Americans are using less plastic. Citibank (C) is lowering credit limits, Capital One (COF) is charging new customers higher rates, JPMorgan Chase (JPM) is upping minimum monthly payments from 2% to 5% on certain accounts, and American Express (AXP) is awarding $300 to select clients if they close their accounts entirely.

The trouble isn’t just that formerly credit-dependent consumers are having a tougher time making ends meet. FICO scores -- the most common measure of a person’s credit-worthiness -- heavily weigh total credit utilized compared to total credit available.

So as lines are cut, outstanding balances as a percentage of total credit lines rise. This in turn dings a consumer’s credit rating, making it harder to get a new card, and in some cases causing existing creditors to jack up interest rates. The vicious cycle continues, and even borrowers with heretofore unblemished credit histories are finding their FICO scores drop for the first time ever.

The solution, as evidenced by dismal earnings reports from the country’s biggest retailers, is simple: Spend less, save more.

Even as lawmakers are making herculean efforts to revitalize the economy by injecting money into the banking system and lowering taxes, reality is moving in the opposite direction.

An anti-spending, anti-consumerist mindset is taking hold across the socioeconomic spectrum. This shift cannot be stopped by flowery talk from Washington - or by vilifying Wall Street in Congress. Spending, the hobby of choice for nearly 3 decades, is becoming the thing not to do. Saving, which had begun to seem positively un-American, is once again in vogue.

This isn't some transitory fad we'll soon forget when the good times roll once again. The current crisis will be felt in the American psyche for decades to come.

Who knows - for our generation, cutting up credit cards may be our answer to the burning of bras.