Tightening of credit cards expected

Credit-card holders, you’re in for a rough ride.

As the financial crisis deepens, some experts say card issuers will be even quicker to raise interest rates, drop people’s spending limits and tighten up credit.

“You can definitely expect that banks will tighten up the credit-card market,“ said Bill Hardekopf, chief executive officer of LowCards.com.

“We’ve now moved into a more risky and tenuous financial environment.“

Even consumers who have good credit habits are expected to suffer some as credit-card issuers move to minimize their exposure and maximize revenue.

“What’s happening — and will continue happening until things get better — is credit-card companies are looking harder at who they’re accepting,“ said Justin McHenry, research director at IndexCreditCards.com.

“What has happened to some extent, and may continue, is holders may find their credit-card carrier playing a little rougher,“ he said.

Capital One Financial Corp., the McLean-based financial-services company that is one of the nation’s largest credit-card issuers, is making adjustments in response to economic conditions.

“We have adapted our underwriting models as the economic environment has changed. And we have gotten more conservative on credit-line assignments and line increases,“ spokeswoman Pam Girardo said.

Some say the recent meltdown on Wall Street only worsened the situation and may have accelerated the probability that a lot of cash-strapped consumers will default on their credit-card debt unless the government throws them a lifeline.

Braun Mincher, a Colorado trend pundit and financial literacy advocate, said the economic crisis will hit consumers hard soon and will make it more difficult for struggling

families to become financially stable.

Many consumers already got hit hard by the housing-price tumble and mortgage foreclosures, he said.

Now bank failures and the deteriorating economy have contributed to a tightening of credit that has left some people without even home-equity loans to fall back on.

Many are now eking out a living using credit cards, Mincher said.

Credit-card companies, meanwhile, are looking to minimize their exposure and pump up revenue in

this flailing financial environment, Mincher said.

As a result, many are lowering people’s credit limits and doing other things that hurt credit-card holders, Mincher said.

If a credit-card company has any concern about a customer’s credit behavior, it may slash the person’s credit card limit from $20,000 to $10,000, he said. Now, the person has fewer resources to make ends meet.

Or, if a person has a $500 limit on a card, the company “would rather give him a second card than raise the limit another $500,“ he said. “There’s more opportunity to charge fees.“

Instead of one account, now the customer has two. If the person goes a day late on one card, the carrier has two accounts on which to raise rates.

Bankrate.com senior financial analyst Greg McBride and some other industry players don’t see a direct link between credit-card increases and events on Wall Street.

“This is stuff that has been happening for over a year,“ McBride said.

But LowCards.com’s Hardekopf said the stormy events on Wall Street indirectly affects credit-card holders because of the riskier financial environment.

“That environment definitely is having an effect on how banks are operating,“ he said. “Banks are having to rethink their business strategy. We are seeing some higher rates and lower limits. We’re not necessarily seeing larger minimum balances.“

Credit limit decreases are not happening across the board, Hardekopf noted.

But issuers will be “quicker on the trigger raising rates and lowering limits based on your credit score changing. If you do anything to make your credit score go down, your credit risk goes up” and you may see an increase in your annual percentage rate.

Also, what’s considered good credit has probably been tightened, he said. Those who fall within the “excellent credit risk” category and who get the best rates are fewer in number.

Credit-card reform measures pending in Congress may help consumers some, Mincher said.

But there’s “a very likely potential” that many people living on credit cards will wind up in default.

The magnitude of the defaults may rival that of mortgage loan defaults, he predicted.

“I’m not saying it definitively, and I’m not saying that it’s happening yet,“ he said. “I think it’s possible.“

Stormy times on Wall Street could “make this happen quicker,“ he said.

It’s like the trickle-down effect, he said. “One thing affects the other.“

Consumers Union in Washington last week sent a letter to Congress urging it to include credit-card industry reforms in any Wall Street bailout package.

“Because the economy is so bad, people are using their credit cards even to pay rent and buy groceries,“ spokeswoman Pamela Banks said.

“Cash-strapped consumers shouldn’t continue to be gouged by excessive credit-card rates and fees by the same financial institutions that will benefit from this bailout,“ the letter stated.

She said if credit-card companies keep raising interest rates and fees, consumers will never get caught up.

“Why not help the very consumers that will bear the burden of the bailout?“