Vision Credit Education, Inc.

Credit card companies have begun tightening lending standards for both new and existing clients. A Federal Reserve survey indicates that both domestic and foreign financial institutions have tightened their lending standards and terms on a wide variety of loan products.

Much news has been publicized about the credit crunch and its impact on mortgage lending. However, according to the Fed survey, this further restriction of credit is also being felt in student loan markets and in the credit card industry.

In January’s identical survey, 10% of banks reportedly were tighting lending guidelines for their credit card products. By April, that number increased to 30%.

This is indeed a substantial increase that is likely to continue as more banks begin looking for ways to curb subprime losses that appear to be spilling over from the mortgage disaster. Financially distressed consumers are turning to their credit cards to help meet growing living costs.

Credit card balances are increasing while homeowners are trying to keep their mortgages current. Renters also are using their credit cards more and more to cover higher gasoline costs and rising food prices.

Credit Crunch is Not the Only Reason

There is one major reason that banks have not stated as a cause for tightening lending guidelines on credit cards. They are anticipating the passage of new restrictions on credit card practices that could substantially lower credit card profits in coming years.

The U.S. Office of Thrift Supervision and the Federal Reserve both support sweeping changes meant to tighten credit card rules that could rattle credit card issuers. These changes include new restrictions related to:

• interest rate hikes
• billing cycles
• stronger disclosure rules
• allocation of payments to multiple rate balances

Banks are seeking to insulate themselves from potential barriers to their lucrative fee income. A reduction in fee income would make credit card issuers much more susceptible to the rising defaults that threaten profits.

Although banks rely less on interest income than before, this could also be lowered due to additional restrictions on the justification of interest rate increases. One major result will likely be less favorable balance transfer offers.