How an economic downturn affects credit cards

The current economic downturn – many would call it a disaster – should affect credit cards in a variety of ways in the remainder of 2009. Credit cards, always a source of strong pro and con opinions, will most likely function differently in the near future. Here are some things to expect and why they may occur in a recession or economic stagnation period.

First, it is best to understand how a recession can affect credit cards economically and why lenders become very careful and conservative with unsecured lines of credit. By comprehending the "big picture," you can better understand the specific changes that might directly affect you.

You won't be surprised to learn that the most important factor is reduced income to credit card lenders. With cardholders' (your) income often reduced and job uncertainty facing almost everyone, many people will restrict their overall spending.

There will, therefore, be less credit card use. Outstanding balances will decline over time, reducing the finance charge income to lenders. And it can get worse for credit card lenders.

The lenders must also worry about collecting outstanding balances they already have. As thousands of jobs are lost, many cardholders endure budget-busting income reductions. Many people are forced to re-allocate their reduced income to rent or mortgage payments, auto loan payments, medical necessities, and education.

Often there is little left for credit card payments. Considering the importance of the former, shortchanging the latter is both understandable and necessary. Obviously, this action plan usually leads to increased credit card delinquencies and defaults.

As you can see, credit card lenders are facing a two-fold problem. They have little choice but to take some actions that will, at least, help combat these potential problems. You might find yourself a recipient of one or more of these action plans.

Credit card changes to look for

As you might expect, the changes in credit cards you may face may not be overly pleasant or welcome. Here are some changes you should expect in 2009 – and, possibly, beyond.

Reduced credit limits

You may not know it, but credit card companies can lower your credit limit, just as they can raise it if they wish. Yes, it can be annoying if your credit card company takes this action, but be aware that you may be affected, even if your payments have been made on time for years. By lowering your credit limit, your lender may be lowering its risk of default.

Higher credit standards

Should you apply for a new credit card, you might encounter stricter credit rules. To qualify for the best interest rates and terms, your credit score may need to be higher than required even just a few months ago.

If you have a good (formerly excellent) credit score, you may still be approved, but you might not be thrilled with the interest rate you are offered. This policy is commonly called "risk mitigation." Your potential lender may be attempting to lower their risk by earning higher finance charges (receiving higher income) to offset the increased losses they believe they will face from other accounts.

Fewer rewards or more difficult to earn incentives

Don't be surprised if your credit card company advises you that reward levels will be reduced or increased card usage is required to earn former incentives. Credit card lenders may take one – or even both – of these actions at the same time.

This is another method that may be employed to reduce costs while increasing income to help offset lower finance charge revenue and projected higher losses.

Fewer offers from credit card companies

While some people complain that they seem to be constantly solicited by credit card companies via direct mail, telemarketing, and e-mail, you may soon become suspicious of these claims by friends and family. As the down economy forces people to reduce spending – and credit card use – lenders cannot justify the cost of expensive marketing plans to attract new cardholders.

They project severely lower card balances (outstanding loans) and much higher potential defaults. It makes little sense to attempt to have a major increase in new credit cards issued.

Stay tuned for more changes

These are but some of the changes in credit cards you should see in the near future. You may hear of even more drastic actions. Some credit card companies may even consider simply closing some accounts – not delinquents, but those that are current – to further reduce their perceived risk.

As unpleasant as these actions may seem, you should also now understand why these policies are adopted. Their actions are similar to your actions in reducing credit card use during these difficult economic periods.

See also: Credit card tips