Millions of Americans have already seen their credit card limits shrink, and millions more face the same fate as lenders prepare for tougher U.S. consumer protection rules.

Since the financial crisis deepened a year ago, credit card companies have been closing millions of inactive accounts, cutting credit limits and raising interest rates to cushion themselves from record loan losses.

This is just the beginning of the biggest shake-up in the credit card industry in at least 20 years, analysts said.

Credit Suisse analyst Moshe Orenbuch estimated available credit card lines will be cut by about 20 percent, or $1.2 trillion, in coming months, and warned that further cuts could result from the provisions of the new credit card law.

Meredith Whitney, one of Wall Street's best known and most bearish bank analysts, forecast that unused credit card lines will be cut by $2.7 trillion, or around 50 percent, by the end of 2010.

Much of the credit line reduction to date has been driven by inactive account elimination, and I think in some respect you are seeing now a contraction in credit lines to individuals that are active, said Sanjay Sakhrani, an analyst at KBW.

Going forward, credit card companies will purge customers rather than risk higher losses. Sakhrani said customers likely to be cut off are subprime borrowers with weak credit and those who switch lenders, lured by teaser rates.


For years, credit card issuers courted borrowers with offers of no annual fees and low interest rates. Lenders could later increase those charges if the clients were late in their payments or exceeded their credit limits.

But a new law signed recently by President Barack Obama forces credit card companies to warn customers about changes in contractual conditions.

Starting in February, lenders will face even more restrictions on imposing fees and raising interest rates. Unable to ramp up these sources of revenue, issuers worried about losses are expected to cut back on lending.

If you have customers lower down the credit spectrum you routinely repriced and you can't do that anymore, you may see card issuers decide that they don't want to extend lines to them anymore, Sakhrani said.

Credit card companies also anticipate they will raise fees and rates before the new law takes effect.

If you assume that the average consumer has five cards, right now most of those cards don't carry an annual fee. If you start charging an annual fee on those cards, the consumer may end up having only three cards, said Scott Valentin, an analyst at FBR Capital Markets. That will have a big impact in the industry's total available credit.


Credit Suisse's Orenbuch forecast credit card mail volume will be down 65 percent this year from 2008. We expect volume to remain well below historical levels, given the economy and new card regulations, he said.

Existing customers will also have less credit to tap.

According to a study by credit scoring company FICO, formerly known as Fair Isaac, 33 million Americans had their revolving credit reduced between October 2008 and April 2009. That is up 25 percent from the previous six months.

And there are more cuts to come. In a recent survey by the Federal Reserve, 60 percent of banks said they expected credit card lending standards to remain tight at least until 2011.

Total credit card lines, both used and unused, declined in June at the largest credit card issuers.

Total lines at American Express Co (AXP.N), Bank of America Corp (BAC.N), Capital One Financial Corp (COF.N), Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N) declined by a combined $32.1 billion, or 1.2 percent, in the month, Orenbuch said.

American Express, the largest U.S. credit card company by sales, posted the biggest June decline, 2.6 percent, while Bank of America showed the largest cumulative decline since October 2008, 28.6 percent, Orenbuch added.

American Express recently canceled 2.7 million cards that had not been used for 24 months and had no outstanding balance, Chief Financial Officer Daniel Henry said last month.

David Nelms, chief executive of Discover Financial Services (DFS.N), said his company was reducing the number of new accounts created.

Valentin estimated credit card firms could close one of every five accounts of subprime borrowers, a segment of the market where Citigroup and Bank of America have the biggest exposure.

You will see a lot less credit available, he said.