Banks tighten up on credit card debt for low earners - Bills.com News

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Banks tighten up on credit card debt for low earners

Tuesday, Oct 13, 2009
By Lucy Sanderson

Lenders are tightening up on credit for lower earners, including credit card debt, reversing the "democratization of credit" begun in the 1970s, the Wall Street Journal reports.

The financial crisis is forcing lenders to become increasingly cautious with risky borrowers. Banks often view low earners as credit risks because their level of debt tends to be relatively high compared to income and assets. In June 2009, banks closed creditcard accounts at a rate of 14 percent to 15 percent annually, concentrating mostly on accounts held by low earners.

"Rather than keeping accounts that have high loss potential and limited revenue opportunity, the mission becomes to close out those customers' lines and drive them off the books," says a report by from TowerGroup, a research firm, cited by the Journal.

This reverses a trend toward increasing levels of credit for low earners that began in the 1970s. Between 1989 and 2007, for example, the number of American households in the bottom two-fifths of incomes with a credit card balance increased from 21 percent to 35 percent. The balances
on those cards increased 180 percent, adjusted for inflation, for the bottom fifth of incomes and 80 percent for the next fifth, according to the Journal report.

Overall consumer credit fell by $12 billion to $2.463 trillion in August, according to the Federal Reserve. Revolving debt, including credit card debt, decreased $9.9 billion to $899.4 billion.

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