Today’s WSJ column by Meredith Whitney is must reading for any business that depends on credit cards or has customers dependent on credit cards. Armed with statistics, Whitney predicts trouble ahead as credit card companies aggressively reduce credit lines to limit their exposure.
Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S….My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010.
Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy. Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57% contraction in credit-card lines.
…Without doubt, credit was extended too freely over the past 15 years, and a rationalization of lending is unavoidable. What is avoidable, however, is taking credit away from people who have the ability to pay their bills. If credit is taken away from what otherwise is an able borrower, that borrower’s financial position weakens considerably.
Whitney calls for national action to avoid a train wreck.
If your business relies on credit cards for cash flow management, it might be a good idea to speak with a bank about a line of credit instead. Be prepared.
And, think about it, beyond the potential constriction on existing businesses and consumers, credit card borrowing is the primary way that new business startups are financed. Startups contribute millions of new jobs each year to the economy…when they can get financing. Ouch!
Topics: Credit, Economy, Middle class
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