Credit Squeeze

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Until recently, if someone entered formal credit counseling, the card companies would often cut interest rates to zero to keep the customer paying. No longer, reports BusinessWeek. Pay it all, and pay it now.

This tough attitude has at least three implications for the short term future of the economy:

First, family debts are tied to each other. If fewer consumers can get any relief, more counseling plans will fail. That means more bankruptcies, and, while they are at it, more consumers discharging other debts such as medical bills. More consumers will also take a second look at whether it makes sense to give back the car for which the loan far exceeds the value. This is also the time to look at the home mortgage and think about whether trying to make the payment after a reset is worthwhile. Don’t get me wrong: this won’t affect millions, but, at the margins, a credit card squeeze on interest rates will push more people to give up altogether.

Second, the race is on. If Discover won’t lower rates, Citi will quickly figure out that a customer’s limited funds are going disproportionately to a competitor. Time for Citi to get tough — and so on.

Third, the news is bad on every front. Employment is down and defaults on home mortgages, car loans and credit cards are up. The consumer can’t pull the load, and the lenders who made huge profits off those consumers over the past decade or so are facing big losses. The idea that a one-shot stimulus will get us out of this mess seems more fanciful every day.

For years, lenders of all kinds loved every consumer. No income? No problem! No credit history? That’s OK. Overloaded with debt? We don’t care. Lenders spread around money as if there were no tomorrow.

Tomorrow has come, and the cheery sales staff has been replaced by tough guys who want their money and they want it now — with interest.

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