Life got more expensive for the Fitzgerald family when their daughter was born last year. So John, a bartender, and his wife, Adela Uchida, an anchor at a local TV station, sometimes used credit cards to charge household expenses such as groceries or the taxes on their two-bedroom home in Lansing, Michigan. That’s not an option anymore, they say, because their bank hiked the rate on one card from 17 per cent to 25 per cent, while another cut their credit limit from $13,000 to $2,000. Now it’s cash only for the couple, who worry about how they would deal with a financial emergency. “The economy here is not good,” says Fitzgerald. “If something happened to me or my wife, we would never pay off these balances.” The credit crisis that began rumbling through the mortgage market last summer is now spilling over to the nation’s other great expanse of borrowing: credit cards. Banks have extended $740 billion to Americans like the Fitzgeralds, a 15 per cent jump over the past five years. With the economy weakening, delinquencies are rising, particularly in states battered by the housing bust. The casualties are piling up. Profits at Citigroup’s (C) US card division dropped 53 per cent in the fourth quarter from the third. JPMorgan Chase (JPM) reported in the latest period a 40 per cent year-over-year jump in credit-card costs, to $1.8 billion. At American Express (AXP) provisions for loan losses rose 70 per cent, to $1.5 billion, a sign that even the well-heeled may be feeling the pinch. “Every day we obsess (over) how bad could it get,” Richard D. Fairbank, CEO of one of the largest card issuers, Capital One (COF), told analysts on January 23. He also conceded that the nearly $2 billion it has set aside for loan losses may not be enough. “The real answer is: Nobody knows.” Banks and other card issuers are lowering credit limits, hiking interest rates, and refusing to approve applications as part of a broad clampdown to prevent more losses. That leaves strapped consumers with few options. Homeowners can no longer turn their equity into cash to pay their bills. Tough bankruptcy laws passed in 2005 narrowed another avenue of escape. So some desperate borrowers are resorting to more perilous measures: raiding their retirement accounts and insurance plans and seeking loans from alternative credit sources such as payday lenders and pawnshops that extract a high price for the cash. The roots of the problem can be traced to the mortgage mess. As housing values ballooned over the past decade, a warm feeling of financial security washed over borrowers, who jacked their cards up to the limit. After all, when they hit the ceiling, they could tap into their equity to pay down their balances¿ Now the trend has reversed. The drop in home prices has wiped out billions in equity, and since families can no longer use their abodes as ATMs, debt loads are mounting and borrowers are falling behind on payments.Excerpted from the cover story in the February 11 issue of ‘BusinessWeek’
