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.

Consumers Squeezed from Both Sides

This post first appeared on Minyanville.

One thing’s for sure. We’re all gonna be a lot thinner!
- Han Solo, Star Wars

American consumers are getting squeezed like aspiring Jedis in a Death Star garbage masher.

Hundreds of billions of dollars in losses have forced financial institutions around the world to rein in credit just when their clients need it most. Amid mounting job losses, falling home prices and high energy costs, consumers are finding it harder and harder to make ends meet.

For years, keeping the lights on was a cinch. If times got tough, getting more credit was as easy as sifting through stacks of junk mail and picking the best offer. Now, issuers are reducing limits, jacking up interest rates and discontinuing promotional offers.

The New York Times reports things could get worse. In the first 6 months of 2008, lenders wrote off around $21 billion in loan losses. Analysts say layoffs and a dim economic outlook could result in another $55 billion by the end of next year.

In an attempt to stem the bleeding, issuers like American Express (AXP) and Bank of America (BAC) are reluctant to give new cards out to anyone, let alone borrowers that seem even the least bit risky. Capital One (COF) is closing inactive accounts; it cut credit lines by almost 5% last quarter alone.

Spending money certainly isn’t getting any easier. And to make matters worse, saving it is getting tougher too.

Hitherto generous 401k matching programs are going by the wayside as companies hoard cash in preparation for lean economic times.

According to USA Today, General Motors (GM), which is hoping for a government bailout, announced last week it won’t match employee contributions to their 401k retirement accounts.

GM isn’t the first, and likely won’t be the last, company to cut costs in this way. Goodyear (GT), Dollar Thrifty (DTG) and real estate broker Cushman & Wakefield have all shut down their matching plans. Goodyear, for its part, actually shut the program down in 2003 and plans to start it back up again next year.

For consumers, this all adds up to one easy decision: Buy less stuff. This doesn't bode well for retailers, or any other company dependent on free-and-easy American wallets.

With credit nearly impossible to get, interest rates on savings accounts plummeting and wobbly banks suckling at the government teat just to stay afloat, Americans may soon resort to the age-old practice of stuffing cash under the mattress.

Who knows, as deflation takes hold and the dollar rallies, it may not be such a bad idea.