Banks get stingy on credit; new cards down 38%

— -- Despite massive government efforts to bolster the credit market, banks are pulling back severely on card lending.

In the first four months of the year — the latest data — banks issued 9.8 million new credit cards, a 38% drop from the same time last year, according to Equifax credit bureau data. Low-risk borrowers can still get credit, but they're getting less than before. The average limit on a new card, after rising during the recession, slipped 3% so far this year to $4,594.

That's discouraging for those who want to see banks pumping liquidity into the economy. "The credit engine needs a tuneup," says Jim Powers, an Equifax assistant vice president.

While it's not surprising that banks are pulling back on unsecured loans as card defaults and delinquencies surge, "what's remarkable is the very sharp decline in lending," says Mark Zandi, chief economist at Moody's Economy.com.

The drop signals a shift in mind-set by issuers, which historically have raised credit card limits through booms and busts.

The government has tried to stimulate overall lending by funding securities backed by assets such as credit cards and mortgages. It's also injected billions of aid into banks in return for preferred stock.

But in the credit card market, policymakers are working at "cross purposes," Zandi says. President Obama recently signed a law imposing far-reaching restrictions on cards, mostly starting in February 2010. Those will likely lead to even fewer cards being issued, Zandi says.

Still, if this trend means issuers are "doing better underwriting, that could be a positive thing," says Lauren Zeichner Bowne of Consumers Union, the publisher of Consumer Reports. What worries consumer groups, Bowne says, is that issuers are closing inactive cards and slashing limits even for responsible consumers.