Commentary: Why Credit Cards Will Never Be the Same Again

By Eva Maria Norlyk

It’s official: The credit card party is over. Pundits have long proclaimed it from the rooftops. If we consumers had any doubt about the wisdom of their words, we need only open the next letter from our credit card company announcing yet another credit limit cut or rate increase to arrive at the very same truth: Indeed, the party is over.

Ah, yes. Those days when easy credit flowed like milk and honey are long gone. Not more than five years ago, my former husband and I funded a seasonal real estate investment business partly using credit cards. In as little as three weeks, we were able to raise up to $150,000 in 12-month interest free loans by taking out several new credit cards with 0% APR balance transfers. No inquiries about what the money would be used for, no required back-up documentation of income, no loan interviews-just a fat $150 Grand into our bank account, no questions asked.

Those were heady, dizzying days, like a reckless, head-over-heels-in-love romance. But alas, that was then, this is now. Our love affair with credit card companies has come to a screeching halt, and as so often happens in a waning romance, the finger pointing will take no end.

And now, in rides Congress, the Senate, and the President himself, coming to our rescue like so many straight-backed, mounted cavalry men, handing out directives, orders, provisions, and regulations to soothe our smarting wallets and rein in the excesses of the credit card execs.

But underneath it all, one simple fact is often overlooked. The end of the days of easy credit was not just the closing of a chapter, but most probably, the ending of an entire book. It heralds the termination of a grand, social experiment, never before undertaken, and likely never again to be carried out in quite the same shape or form.

Credit cards in two short decades created financial history. They marked the first time in lending history that unsecured credit was handed out, almost willy-nilly, to a large number of people. Also totally unprecedented, those loan decisions were based on nothing more than a statistical assessment of how responsibly a given consumer would handle debt.

The credit card boom was founded on faith, firstly in the basic premise of FICO scores-that a person’s financial behavior can be predicted from his or her past behavior-and that secondly, Fair Isaac Corp’s FICO scores accurately and reliably encapsulate that behavior in a little 3-digit number-the credit score.

Unfortunately, changing economic conditions lead to changing behaviors, and hence, higher risk for card issuers. As a result, not surprisingly, credit card companies are reeling under mounting defaults, already creeping above the 10% mark of their credit card loan portfolio and expected to increase even further.

Credit cards will never be the same again, because the current environment will force card issuers to change their business model. Giving unsecured credit lines with high interest to marginal consumers is a great business, as long as the number of people who pay it off outweighs those who do not. It’s a really bad business, however, when the scale tips in the other direction and defaults begin to rise.

As a result, going forward card issuers must, and indeed already have started to, focus on the segment of customers that are the most likely to honor their debts. That means those Americans with high-end of credit scores will see red carpets rolled out wherever they turn. Those at the lower rungs of the credit score ladder will find the doors closing, fast and furiously.

Over the course of just two generations, we Americans have come to assume that borrowing is one of our inalienable rights; that sound financial management means buying now and paying later; and that the lenders who foot the bill are there to serve us while asking nothing, or at least very little, in return.

But financing our lives through borrowing never was and never will be a great way to live. The average household credit card debt is close to $9,000, and that’s without including mortgages, car or student loans. Now that the party is over, we’ll be left to come to terms with that antiquated, outmoded notion-spending only what we earn, after we’ve earned it. And that might not be such a bad thing after all.

Published: September 30, 2009