Credit card companies face major changes amid job losses, unpaid bills

Credit card companies are in a precarious position in 2009 as some consumers start to batten down the hatches and reduce their spending, while other face potential bankruptcy.

That could mean some noticeable changes with Visa, MasterCard and American Express, from higher interest rates to a more aggressive chase against unpaid debts.

"There's definitely going to be more tightening," said Michael Kon, an analyst at Morningstar in Chicago who has been watching the industry respond to a widening set of troubles south of the border.

He said mounting job losses and an increasingly dismal U.S. economy have left U.S. banks wary about handing out credit readily to consumers.

Those attitudes are already permeating into Canada and should only worsen this year.

Earlier in January, Statistics Canada reported the economy shed 34,400 jobs in December, pushing the unemployment rate up three-tenths of a point to 6.6 per cent.

"Banks are being very cautious … and are not ready to extend credit, whether it's mortgages or credit card loans," Kon said.

"What we see is banks cutting credit lines, cancelling credit cards for risky consumers. We see quite a strong tightening wave across the industry."

'Repricing of risk'

Major credit cards are operated through Canada's banking system, which means that rates and bills are managed by financial institutions rather than the credit card companies themselves.

"There's a repricing of risk going on," he said.

"Although interest rates are declining, the spreads are widening, in some cases consumers may pay more [interest] than in the past just because they are more risky than other consumers."

The banks are the bellwether of the credit industry, and they've been making major changes to how they lend to consumers because they're afraid of defaulting accounts, says Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier Inc.

"In good economic conditions they want larger balances, and for consumers to pay less [on their credit card bill] and more late payments," he said. "But, at this point in the cycle [they're trying] best as possible to get them to pay back as much as they can."

A study by the Vanier Institute found that average household debt in Canada surged to more than $90,000 in 2008, while the total debt to disposable income ratio climbed to 140 per cent.

The study also found that spending has increased twice as fast as household income since 1990, while total debt grew six times faster than income in the same period.

The changing economic climate worries Laurie Campbell, the executive director of Credit Canada, a non-profit credit counselling organization.

More defaults expected

She says that the increasing number of job losses means there will be a "huge" increase in defaults this year.

"We've seen a situation where certain creditors have increased interest rates for individuals who have missed more than two payments," she said.

"My fear would be that they're concerned that if they don't get to those people then they will go belly up. So [the banks] will come down too hard on them."

Campbell is pushing for credit card companies to encourage a dialogue with their clients and come up with a compromise for the ones who are facing major financial problems.

The credit card issuers have "got to find a middle ground that's going to actually work for them to recover as much as they can without appearing too militant or draconian about it," she said.

"We're seeing a situation where Canadians are one or two paycheques away from financial disaster. If people lose jobs, you can see how they would turn to credit fairly quickly."

A recent poll by Manulife Canada found that 35 per cent of Canadians who responded say their top financial priority in 2009 is paying off debts and reducing their mortgages.

About 24 per cent said that consumer debts, such as credit cards, are their greatest concern.