Tuesday, March 10, 2009

Credit Card Crunch?

So it looks like the credit card companies will be rolling back their lines of credit to consumers:

Prominent banking analyst Meredith Whitney warned that "credit cards are the next credit crunch," as contracting credit lines will lower consumer spending and hurt the U.S. economy.
"Few doubt the importance of consumer spending to the U.S. economy and its multiplier effect on the global economy, but what is underappreciated is the role of credit-card availability in that spending," Whitney wrote in the Wall Street Journal.
She said though credit was extended "too freely over the past 15 years" and rationalization of lending is unavoidable, what needs to be avoided was "taking credit away from people who have the ability to pay their bills."
Whitney said available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone, and she estimates over $2 trillion of credit-card lines will be cut within 2009, and $2.7 trillion by the end of 2010.
I love the how this Whitney character says that we need to avoid taking credit away from people who have the ability to pay their bills. I may be a simpleton, but in my view, if you can pay your bills, why do you need a credit card? I don't have a credit card myself and I refuse to get one in the future.

This comes as good news to me because essentially it will force most people to learn how to pay cash for the things they need and want. If our economy was based on consumer spending through financing and lending, then I want it to fail. For one thing, you get seriously ripped off when you finance anything. This is because on top of the interest and fees, the product you buy is usually overpriced anyway. You tend not to think about the total cost of the product when you have to make monthly payments. Instead you think of how much will it cost you a month and for how long.

In truth, most of the stuff bought with financing and credit cards could easily be bought for less when you have the money to pay for it. In fact, I expect prices on a lot of consumer goods to go down because of the credit contraction we are experiencing right now.

So really, Meredith Whitney is freaking out and trying to hype up the destruction of her lifestyle and those around her. The of America is starting to figure out how to survive without credit and without lending.

Now I know that a lot of people are wondering about their credit scores and how mine may be that great when I go to buy a house, but the truth is, if I have to, I will purchase a house with 100% cash. I absolutely refuse to play the bank's game because like in Vegas, the house always wins. If the rest of America stops playing the bank's game and forgets about their FICO score (which is nothing more than how much debt you have and how well you pay it), then we'll probably see a much stronger economy in a decade or so.

It certainly is amusing, though, to see various pundit see their preconceived notions of financing be dash on the rocks of reality.