Adverse selection in the credit card market?
It's been a bad year for the credit card business. A sharp recession means consumers aren't paying back their loans. New regulations mean old avenues for profit are blocked off. The result, as the New York Times reports today, is that rates are spiking, new customers are paying higher fees and fewer applicants are being approved for credit cards. Indeed, between September 2008 and September 2009, the number of Visa, Mastercard and Discover card accounts actually fell by 12 million.
Put together, credit cards are becoming harder to get and less valuable to hold. And that probably means we're going to be seeing fewer of them. Debit cards, along with prepaid credit cards, break the convenience of plastic away from the dangers of debt. That doesn't work for everybody -- some people need short-term credit -- but it works for a lot more people than are using it now, and we're likely to see a greater percentage of the market realizing that.
The problem is that the people who migrate toward debit cards are the people who have enough money not to need much credit and are responsible enough to not want it. The good risks, in other words. The people left in the credit card market will be disproportionately bad risks, which means rates will go up and standards will tighten, which will in turn drive more people out of the market, starting the cycle over again.
Photo credit: Mark Lennihan/AP.
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