by Joseph Kenny | 12/31/08

Many major US credit card companies are now closing thousands if not millions of accounts, cutting their credit lines, and increasing interest rates. All of this was mandated in an effort to protect themselves from inevitable increases in consumer default rates.

Unfortunately, there are clear signs that the measures may be largely ineffective in dealing with what are becoming serious issues to many banking institutions. There is some speculation by experts that credit card issuers will suffer from the same serious circumstances that created the subprime mortgage crisis. There are many similarities between those factors that caused the mortgage markets to plummet and credit card markets.

Despite the fact that credit card debt accounts for a much smaller percentage of overall debt than mortgages, the consequences of a credit card meltdown could be severe for major card issuers like JP Morgan Chase, American Express, Citigroup, and Discover. None of the big names can afford to take another major hit.

Some experts are not sure what the current financial climate will mean over the long term. Some look to the current unemployment rate versus the overall debt numbers for some answers. Yet, there is no specific way to approach the unique circumstances of the market as a whole.

Since 1994, when unemployment was at comparable level, the amount of consumer credit has more than doubled. Many economists are suggesting that the unemployment will rise to about 9 percent before topping out.

Write-downs by financial institutions around the world have reached $500 billion in bad assets and toxic loans as a consequence of the US credit crisis, which was a consequence of the housing market implosion. Credit card lending standards have undergone serious revisions across the board in order to reign in the amount of possible defaults but limiting who can actually obtain credit.