Counting on Your Credit Cards to Help? Don’t.

08 Oct Counting on Your Credit Cards to Help? Don’t.

Credit card losses are climbing at banks and the profits are shrinking. If you are counting on cred cards to help you get through this economic bad patch, don’t be surprised if your credit limits get cut.

Banks are typically borrowing money to lend to you on a credit card. They may borrow the old fashioned way — by taking in deposits from customers — or from the Federal Reserve or on Wall Street, but typically the bank is making money on the difference between what it pays its creditors (like depositors) and the interest and fees it gets from lending you money on a credit card. That margin is getting squeezed, so you’re going to feel the pain too.

Banks are being hit with a triple-whammy in this regard. They’re having trouble finding anyone who will lend to them and most of the rates are going up, not down, except from the government. More people are defaulting on paying back credit cards — Bank of America reported its losses on about $184 billion of credit card loans increased to 6.4% from under 6% three months earlier. And they are having more trouble finding investors who want to take these loans off their hands.

An unused, available credit limit to you “costs” the bank something. It has to keep a certain amount of capital — hard money — on hand for credit it extends, to keep the regulators happy. That capital is harder to come by. And an unused credit line to anyone is a potential risk to them — with losses growing every month on consumer loans, the risk of having large credit limits out to you may eventually exceed the possible profit from you. It’s another example of the old saw: Bankers only want to lend to you when you don’t need it.

So expect more cuts in credit limits in the future and don’t count on the bank being there when you need it. Cash is king.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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