Credit Cards Losses Mean More Credit Tightening

Credit card losses at large banks continue to pile up. This will mean less credit for consumers in the future.

Citigroup reported that it lost $176 million on credit card securitization operations in the second quarter of 2008. That is on top of setting aside $735 million for credit losses and over $345 million in North America alone in additional costs of credit. Even if you don’t know what all those things mean, that’s a lot of money!

Keep in mind this other tidbit: Citigroup earned $243 million in the year-ago period on the same credit card lending activity.

OK, so Citibank is losing money on credit card lending. Boo-hoo. Anyone dealing with their default interest rates and collection department is probably not shedding a tear right now. But in reality this is important. As the credit card banks have to set aside reserves for losses and as their costs of borrowing money to lend out to all of us, there is ultimately less lending to trickle down to keep our financial houses in order.

The same problem is hitting car lending. And of course home lending.

In some circles this is referred to as “The Great Unwinding.” By which, we mean the unwinding of a lot of the “leverage” — debt — that has become the driving force of Western economies on the grand scale — and American families on the small scale. Appropriately, earlier this year Citi’s own economists were discussing this problem. It may takes years and a cut in everyone’s lifestyle before it is finally resolved.

In the meantime, the lesson is becoming clear: Cut your fixed costs to live within — or below — your means. And the sooner, the better.