A lot of types of businesses have taken a turn for the worse during this recession but few have been impacted as negatively as credit card companies. The credit card business was a great business for a long time–consumers had the financing they needed. Most made their payments. And, the companies providing the credit made billions of dollars because so many people refused to live within their means. The recession combined with the credit crisis has been a nightmare for credit card companies and if economist predictions about the recovery of the economy are correct, it’s likely to get worse before it gets better for credit card issuers.
A growing number of credit card holders are falling behind on their payments. In October, the number of people that were at least 60 days behind on their payments increased again and analysts expect this trend to continue. There are several factors working against credit card issuers in this economy.
New Legislation: Lawmakers are being held accountable for the lack of regulation in the financial industry that led to the collapse of several financial institutions and billions of dollars in taxpayer bailouts. Credit card companies who used to have the ability to hedge risk by increasing interest rates and cutting credit limits are seeing their powers in these areas limited by the new Credit Card Accountability, Responsibility, and Disclosure Act that was signed into law this past Spring. A year from now, the credit card industry will look very different than it did just a year ago.
Customer Delinquencies: Credit card companies depend on the ability of their customers to make payments. The weak economy has led to massive delinquencies and with so many people struggling to make their mortgage payments it’s easy to see why credit card payments are falling by the wayside. Part of the reason so many companies are cutting available credit lines is to reduce the risk of customers in financial trouble piling up credit card debt and then failing to pay it off.
Unemployment: The reason why recovery for credit card issuers will be slow is that so many people are out of jobs. In a recent Wall Street Journal survey, economists predicted that a year from now, unemployment would still be in the neighborhood of 9.5%. If the job market is slow to recover and personal incomes continue to be stagnant, people who are spending down their savings and hoping for a miracle might be the next wave to stop making their credit card payments.
Public Perception: One of the big hurdles facing the credit card industry that is harder to quantify is the negative public perception. The media coverage of credit card issuers and the way they’ve treated their customers have turned the public against the industry as a whole and that will be a difficult problem to overcome. A popular rant posted on YouTube against the credit card industry become one of the most watched videos of the year and fueled the fire of other customers who were frustrated with their card issuers. As the economy stabilizes, issuers will need to treat their customers with a higher level of service to regain their trust but it’s a battle that will probably take years to overcome.
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