Tighter credit card lending may create fresh financial crisis

First came the mortgage crisis. Now comes the credit card crunch.

After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.

The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of unprecedented losses, after a gilded era in which it reaped near-record gains from the business of easy credit that it helped create.

Lenders wrote off an estimated $21 billion in bad credit card debt in the first half of 2008 as more borrowers defaulted. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year-and-a-half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.

"If unemployment continues to increase, credit card net charge-offs could exceed historical norms," said Gary L. Crittenden, Citigroup's chief financial officer.

Faced with sobering conditions, companies that issue MasterCard, Visa, and other cards are rushing to stanch the bleeding, even as options once easily tapped by borrowers to pay off credit card obligations, like home equity lines or balance transfers to new cards, dry up.

Big lenders - like American Express, Bank of America, Citigroup, and even the retailer Target - have begun tightening standards for applicants and are culling their portfolios of the riskiest customers. Capital One, another big issuer, for example, has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent in the second quarter from the previous period, according to regulatory filings.

Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or work in troubled industries. In some cases, lenders are even pulling in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.

While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, since lenders have 30 days to notify their customers, and often wait to do so after taking action.

The depth of the financial crisis has shocked a credit-hooked nation into rethinking its habits. Many families once content to buy now and pay later are eager to trim their reliance on credit cards. The Treasury Department, which is spending billions in taxpayer money to clean up an economic mess brought on in part by easy credit, recently started an ad campaign inviting consumers to check into the "Bad Credit Hotel," an online game that teaches the basics of good credit.

"We are not going to say, yahoo, this is over and extend credit like we did without fear," Jamie Dimon, JPMorgan Chase's chief executive, said in a recent conference call. "If you're not fearful, you're crazy."