Many Americans, voluntarily or not, cut back on their use of lines of credit during the Great Recession. It was harder to get credit for one thing, and using an existing credit card became a lot more expensive as banks, suffering from losses due to investing in toxic assets, levied new fees on everything from phone payments to inactive accounts. At the same time, to limit risks, banks slashed customers’ credit limits as much as 90%. Struggling to make payments on existing debt, a lot of people decided to postpone purchases if they couldn’t afford to pay for them with cash. Some people, sobered by the economic devastation they witnessed touching friends and neighbors went even farther and paid off debt and closed accounts. With jobs uncertain it was no time to have debt hanging over one’s head.
Even though the Recession is officially over the reluctance to use credit continues. The Federal Reserve Board reported this week that credit card borrowing fell at a 6.3% annual rate in July. The last time borrowing with credit cards increased was in August 2008 – before the Recession.
While individual Americans may be willing to wean themselves from the use of credit, it isn’t as easy, or effective, for businesses to do the same. Many businesses, especially in the early days, need to borrow money – to invest in expensive equipment, purchase raw materials, lease facilities, for construction, to fund business expansion, and so forth. This money flows into the economy in the form of jobs. And one of the reasons the job market is stalled is that businesses are still having problems securing loans.
The bank bailout program or TARP (Troubled Asset Relief Program) began under the previous administration and carried forward under the current one, appears to have been a success in stabilizing our financial institutions. At least as far as larger banks like Bank of America and Citicorp are concerned (many small banks went under during the Recession). In terms of American businesses that need and rely on credit, the bailout hasn’t had the desired effect.
From June 2008 to June 2010, commercial and industrial lending by commercial banks declined by $222 billion or 18 percent, from $1,204 billion to $982 billion. Over the same period, small-business lending by commercial banks declined by $57 billion or 8 percent, from $661 billion to just $604 billion.
In the meantime, a lot closer to home, banks, now that excessive late fees and overdraft charges have been banned by the Card Act that went into effect in August, are finding creative new ways to charge customers more for credit cards, so-called “free” checking accounts and banking services. Yes, it’s time to check the fine print on your statement (if you are still paying for those paper statements) and see whether your account is now subject to penalties for not keeping new higher minimum balances or maintenance fees.
Citibank (yes, the Citibank that was bailed out) announced changes to its checking accounts this month and will now assess monthly maintenance fees of up to $30, depending on whether the customers meet certain requirements for their accounts. Hey, they have to come up with some way to pay back the TARP funds and those big CEO salaries!