Over the last 15 years Americans have become used to large amounts of unsecured credit through home equity lines of credit, installment loans and credit cards etc. Believe it or not; to some degree this does make America the superpower the way it is. Americans are known for spending, spending more than they can afford. It’s a no brainer that spending stimulates the economy. However with banks facing unprecedented losses in unsecured lines of credit and at the same time government tightening regulation on how much fees can be charged on these loans, industry experts are speculating that these lavish times may not last for very long. Now let’s think about what it means to consumers. From a borrowers point of view lending would be limited to two basic products:

1. Lending against collateral: This used to be the common norm for very long time. We would move back to an age when the collateral amount used to be always greater than the amount you remain to pay. For example if you need to a credit card for 5000$, you either put a deposit down or show property that evaluates higher than the credit line. That will be the only way consumers will be able to enjoy the benefits of the card.
2. Lending for short periods of time with abilities to re-price: The recent regulations have made it difficult for banks to change the terms of consumers who have shown bad behavior on open ended loans. For good people to get loans at good terms banks have to re-price for risk. Hence we might see a slew of new unsecured lines of credit which are close ended and the banks have the ability to re-price the consumer if he shows a negative behavior.

What does it all mean to an investor? Well, you might want to hold your breath and watch before you invest in any credit card companies. If you are an active trader and are open to taking some risks, this might be a good time to invest in credit card companies. Because believe it or not, these companies are going to come up with a plan B to keep the business they have enjoyed so far.

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