If you, like me, have seen a drastic decline in credit offers then you must be wondering how Americans can continue fueling their spending and close to 0% savings rate.  Historically, personal consumer credit has been a hallmark of the Amaerican economy and we were “privileged” enough to be able to afford house 10 times our income with $0 in equity.

This weekend, the NYTimes also has a feature on credit card debt highlighting the importance of credit card spending and the return of the layaway…if you’re old enough to remember what that means.

The street seems to be worried about default losses on consumer credit cards increasing as the trickle down effect from mortgages spreads.  However, by limited credit approvals and eliminating balance transfer offers, banks are actually going to expedite the impact of credit default losses.

Many Americans finance their lives on credit card debt and revolving credit.  2007 saw a peak of revolving debt above $8000 per household.  However, due to cheap financing options in the country and the availability of credit Americans were always able to “refinance” their credit card debt with vehicles such as balance transfers and teaser rates and even personal loans that have been taking off in recent years. What happens when this option comes immediately to a halt? It’s like hitting a figurative brick wall.

Not only will spending have to normalize, but the existing consumer debt will become a greater and greater burden as the option of cheap financing fades and teaser rates expire and again hit 10%-18%.  Once this happens I bet we will begin to see delinquency roll rates increase and then a peak of credit card charge offs.

What then will happen to those banks that weathered the subprime mortgage storm such as JPMorgan Chase who also has immense exposure to credit card debt?  Only time will tell, but I wouldn’t put my money there.

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