Are Credit Cards the Next Incarnation of the Credit Crunch?

By Miranda Marquit

March 10th, 2009

For more than a year, financial news has been dominated by the fact that defaults in home mortgage loans have caused a credit crunch: Banks are less willing to lend — even to those with reasonable credit. But the credit markets aren’t sorted out yet, and the next phase of the credit crunch could be coming. There is speculation that credit cards are the next wave of credit defaults. If this is true, it will be a long road to economic recovery.

Indeed, CNN Money reports that delinquencies are already at record highs for credit cards:

“Record credit card delinquencies are just the latest sign that U.S. consumers are under considerable levels of stress,” said Fitch managing director Michael Dean in a written statement.

Record delinquency rates are a harbinger of record default rates, according to the report.

“The latest numbers point to even higher default rates and worsening consumer credit quality measures in the coming months,” said Dean.

Credit cards have long been considered the ultimate in “easy credit”, available to almost anyone. Now, though, things are changing. Credit lines are being reduced, and account holders are being encouraged to close their accounts and pay off the balances. Credit card companies are worried that more defaults are on the way, and that means that they are less likely to provide credit — and more likely to reduce the credit available to current account holders.

The rise of P2P lending?

With credit cards becoming less of a cash flow management tool for more people, it is likely that more and more people could turn to P2P lending to close the gap. This provides the opportunity for ordinary people to lend to their peers in an effort to help them overcome the issues of the economy. It will be interesting to see whether or not P2P lending fills a void that is being left by more traditional financial institutions.

Understanding Unsecured Loans for Debt Consolidation (helpwithdebtnow.com)
Meredith Whitney Scares Us All again says credit cards are the next credit crunch. (ceoworld.biz)
Credit-Card Charge Offs Jump (blogs.wsj.com)

Mortgage Rate News