Money Matters - Simplified

More Reasons to Worry About Credit Card Companies

Last month, I showed how massive cuts in idle consumer credit lines could equal hell for credit card processors like Visa (NYSE: V) and MasterCard (NYSE: MA).

Turns out, the problem might be bigger than I thought.

The Federal Reserve released its monthly report on consumer credit, and it ain't pretty. Revolving credit balances fell 9.7% in February -- the largest decline in 31 years.

This creates a two-pronged battle sucking the life out of the credit card industry:

Citigroup (NYSE: C), Bank of America (NYSE: BAC), and JPMorgan Chase
(NYSE: JPM) are drastically slashing open lines of credit and jacking
up interest rates on existing balances. In the fourth quarter alone,
$500 billion of credit-card ammo was yanked away from
consumers.Consumers themselves are ditching credit cards like their
lives depend on it. With the personal savings rate blowing up
and the specter of unemployment on nearly everyone's mind, there's a
mass exodus from consumer credit like we haven't seen in 31 years.

Now,
for the American consumer and the economy as a whole, this is about as
good as it gets. Higher savings and less debt is exactly what we need
to move our economy from Neverland to reality.

But for card giants -- particularly Visa and MasterCard, which still
trade at premium multiples -- we're looking an industry that's
unrecognizable from even a few months ago. The boom in plastic
transactions that propelled card processors to glorious heights is
quickly losing a core segment -- credit. Heck, American Express (NYSE: AXP) has even offered to pay some customers $300 to close their accounts.

While card processors are far from hurting, that isn't the kind of
behavior you'd like to see from an industry with double-digit growth
expectations baked into its share prices.

For related Foolishness:

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