According to numerous recent news reports, credit card companies are looking at their options in the face of rising defaults and an economy that doesn’t seem as though it will enjoy significant improvement any time soon. With unemployment rising and consumer spending falling, credit card lenders are eyeing record levels of credit card debt nervously and tallying up potentials as they make decisions on how to proceed in the economic circumstances of today.

The Bottom Line For Consumer Credit

Credit card companies don’t offer credit cards out of the goodness of their heart. This type of lending has been fairly lucrative and the goal of credit card lenders is to continue making money, as is the goal of any profit seeking business. However, with the record levels of credit card debt accumulation – standing at about $830 billion in October 2008, according to a recent CardTrak.com report -- that recent years have brought and a sudden reluctance of investors to purchase credit card debt backed securities and other financial instruments, as well as falling stock share value, in the current economic climate, with the fiscal storm clouds now hovering on the horizon, many credit card lenders are starting to weigh the risks of unsecured credit card debt much more carefully.

Many of these lenders are banks that also suffered heavy losses in the sub-prime mortgage meltdown. Some have balance sheets that have frightening holes in them and looming loss potentials related to the shuddering derivatives market. All in all, for many credit card issuers, it has become more risky to their financial well being to lend than it is to give up the potential income of making those loans, even with the ability to raise rates and modify terms and conditions as they please.

Thus, according to recent news reports citing the well-known Oppenheimer and Co. banking analyst Meredith Whitney, including a December 1, 2008, Reuters article, “the U.S. credit-card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking.” As reported by Reuters, Whitney explained that the tremendous affect on consumer spending would be because “credit card is the second key source of consumer liquidity, the first being jobs.”

While that reduction in consumer spending has the potential to cause fiscal pain to credit card companies – as less lending means less money made in interest, fees, etc. -- at this point, for many lenders, the credit reduction avenue is less threatening than the potentials of facing credit card debt defaults and an increasing lack of liquidity as investors continue to become more reluctant to invest in and more frightened of debt backed financial instruments. 

What It Could Mean For You

Credit card holders nationwide are reporting significant reductions in credit limits and sharp increases in interest rates, often without obvious cause. Even people who have good records of on time payments are being affected. Furthermore, it is not only the individual consumer that is experiencing decreases in credit limits and increases in interest rates. Small businesses also are struggling with these often abrupt changes, adding additional stress and strain to their ability to remain solvent.

While a reduced credit limit may not mean all that much to consumers that are planning on reducing spending in the current economic climate anyway, the sharp increase of interest, often applied to not just to new purchases, but also to back balances, can be add quite a debt burden. However, that is not the only affect of such actions by credit card companies.

Many consumers and small business owners have reported that their credit score has suffered by these quiet changes in policy, because an important part of determining credit score is “based on "amounts owed," including the ratio of your balance to your available credit, called the "credit card utilization ratio." The more you've tapped your available credit, the worse your score,” according to a recent Wall Street Journal article.

How To Protect Yourself And Your Credit Rating

Now, more than ever, it is essential to keep a close eye on your finances. You need to check your credit reports closely. Address any errors or inaccuracies quickly and resolve them. Make sure that you do your best to pay bills on time, reduce debt, and pay more than just the minimum on your credit cards, ensuring that positive information is what the credit reporting agencies get on you and your financial habits.

Watch all credit card statements carefully and review any documents about terms and conditions that you receive. If you didn’t take the time to read the small print when you got your credit cards, do it now. That way you can do your best to avoid pitfalls that could lead to more costly credit.

While those actions are no guarantee that a struggling credit card issuer will not choose to reduce your credit limits or increase your interest rates, they can help to make such actions less likely to happen or less likely to have a significantly negative impact on your overall credit score.

Although many are certain that the contraction of consumer credit is going to be extremely detrimental to the overall economy, there are other points of view. Reducing dependence on credit and consumption may be difficult in the short term. However, in the long term, returning to a means of money management and personal finance choices that reflect thrift and saving can serve our personal finances and national economy well by making all of us financially stronger and less vulnerable to economic downturns and systemic turbulence.