Lowered credit scores, fewer choices, and then, increased interest rates and higher minimum payments — and this will prevent defaults?

Let’s see, according to a Bloomberg article by Alexis Leondis, “American Express, Chase Cut Card Limits, Lowering Credit Scores,” banks are cutting “credit limits to guard against risk and prevent delinquency and charge-off rates from increasing.”  However, once again, we observe bank executives demonstrating that they have no sense of cause and effect.  How many times must I say, when you hurt consumers and small businesses, you actually make things worse, and not better?

Perhaps the banks have grown so accustomed to seeing customers as prey (looking for those who are weak, so they can whack them with fees and sky-high interest rates), that they are unable to understand that we, as a nation, are on the brink of a financial disaster.  Why?  Because no one in government, no regulator, and certainly no one in the financial services industry seems to “get it.” 

When customers incur lowered credit scores, fewer choices, and then, increased interest rates and higher minimum payments, guess what else they can’t do?  Well, I’ll give you one example of “cause and effect” that doesn’t require a title like “CEO” of JP Morgan Chase, Bank of America, Citi, or American Express to figure out: that customer can’t buy a house.  This started with houses, remember?   

If the customer is an entrepreneur, this may hurt the small business owner directly, and then his or her employees (and their families, and so on).  Layoffs may follow.  Indeed, one of the key individuals in the Bloomberg article, Wayne Brown, who owns a construction company was quoted as follows:

“Interest rates on all of my cards are going up now and my minimum payments are almost doubling because it looks like I’ve maxed out my cards,” said Brown, who uses credit cards to fund his home-building company. “It’s a Catch-22.”

A healthy consumer is a prerequisite to a healthy economy; a healthy economy is not just the best way to guard against delinquencies and charge-offs, it is the only way for the financial services industry, or any other industry, to survive and prosper.   A healthy entrepreneurial environment is our only hope, and credit card companies, after pushing and promoting and signing up millions of individual account holders with business credit card accounts, professional accounts, and personal accounts, are calling in all of these loans — and now we are supposed to believe that somehow this course of action on the part of the banking industry will prevent defaults? 

In addition, for those who do survive this present period of being beaten up by credit card companies, I would point out that most entrepreneurs have a very long memory.  Entrepreneurs have noticed all along that banks in general tend to treat them shabbily until their businesses are strong enough such that they no longer really need start-up capital; that’s when the small business specialists and loan officers come out of the woodwork, lovey-dovey, kissy wissy, to “help” (and at that point, the entrepreneur typically thinks to him- or herself, “Where in the hell were you bankers, when I really needed you?”).

The FICO scoring system may eventually be changed to reflect the fact that these consumers and small businesses really have not done anything to deserve being reclassified so unfairly (Mr. Brown’s score dropped from 760 to 650 over the last 13 months), but by the time this happens, there will be so many foreclosed homes, closed businesses, unemployed people, and other sufferers at the hands of these short-sighted individuals who are running “our” banking system (we are part owners, now, as bail out money shareholders), I fear the prospect of calamity in the streets.