Credit cards next in line for tightening

As consumers watch their wealth disappear in the markets, some are also at risk of losing one of their last spending lifelines: credit cards.

Consumer credit has grown steadily even as the housing market has gone bust and many credit sources have dried up. That is largely because consumers have piled on credit-card debt, increasingly to pay for staples such as groceries and gasoline. That spending has helped keep the economy out of a deeper recession.

Revolving credit, which includes credit cards, has grown faster than nonrevolving credit, or installment loans such as mortgages, since May 2006, according to the Fed. But that growth rate has been slowing for most of the year, suggesting it may fade as a source of consumer-spending power.

The Federal Reserve on Tuesday releases consumer-credit data for August. Credit likely rose because of a flurry of automobile loans that month. The data are relatively ancient and by themselves say little about the trajectory of consumer spending. But the forward trends are not good.

“Banks are starting to see increased delinquencies on their credit-card portfolios and are trying to raise rates and tighten terms on payment,” says Richard Moody, chief economist at Mission Residential. “It’s an implicit way of tightening credit.”

Consumers aren’t close to maxing out their cards: Commercial banks had nearly $4 trillion in untapped card credit available in the second quarter, according to the FDIC.

But tighter terms will discourage some families from tapping that credit. Others, particularly those with lower incomes or who have recently lost jobs, may have little choice but to keep using cards to pay living expenses even if they can’t afford the interest. That will keep delinquencies rising and hurt the banks, leading to still-tighter credit and more bad news for the economy. Even an emergency Fed rate cut, part of Monday’s market chatter, might not help.