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Credit Card Debt: Next Big Hit to Banks?

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Given how overextended consumers are, and how banks have been cutting back on the cheapest piggybank, home equity loans, by slashing those credit lines, and the reports of rising delinquencies from even conservative lenders like American Express, one would think we’d also be hearing more about serious increased in credit card losses.

But under the new bankruptcy code, if you do no qualify for Chapter 7 bankruptcy (crudely, if you are above the average income in your state), it is easier to walk from your mortgage than your credit card debt. So credit card issuers may be showing lower losses than they otherwise might because other lenders are taking the hit,

That may be about to change. From MarketWatch:

Credit-card debt is on the brink of imploding and will be the next storm to hit the fragile finance industry, an investment research firm predicted this week.

According to Innovest StrategicValue Advisors, banks will charge off $18.6 billion in delinquent credit-card accounts in the first quarter of 2009 and $96 billion in all of 2009, more than double the research firm’s forecast for all of this year.

Innovest projects that amount would be high enough to damage some of the biggest card issuers.

Credit-card charge-offs are “defying gravity” when compared with the problems in the mortgage market, according to Gregory Larkin, senior banking analyst for Innovest. But that will change as they catch up with mortgage charge-offs, which have spiked eightfold since the third quarter of 2007.

“If history is any indicator, there should be an equivalent surge of credit-card charge-offs very soon,” he said, though he concedes that an eightfold increase would be very aggressive.

Comparatively, charge-offs reached $4.2 billion in the first quarter of this year and $3.2 billion in the same period a year before, according to the Federal Reserve, which only reports non-securitized debt. Innovest’s projections include all credit-card debt, which the firm believes is double what the Federal Reserve reports. For all of 2007, charge-offs tallied $26.6 billion, according to Innovest’s calculations, and the firm estimates they will reach $41.5 billion at the end of this year.

The jump in credit-card charge-offs is linked in part to the credit crisis now in play. As banks have tightened lending standards, they have mostly done away with the once-popular roll-over options — usually at 0% introductory rates — that allowed borrowers with delinquent accounts to get new cards elsewhere. Larkin believes all that bad credit is going to surface quickly and could have a similar impact as the mortgage crisis has had on banking.

But credit-industry analysts shake those prognostications off, noting that the number of dollars involved in credit cards loans versus mortgages is substantially lower.

“Defaults on $2,000 or $5,000 in credit-card debt are entirely different than someone defaulting on a $500,000 mortgage,” said Greg McBride, senior financial analyst for Bankrate.com.

“I’m skeptical that the magnitude of credit quality is going to be as severe as some say,” he added.

The average credit-card debt is $2,200, according to the Federal Reserve. On a revolving basis, there was roughly $970 billion owed on credit cards at the end of July. However, because many people use credit cards for the rewards programs and pay off their debt each month, it’s unclear how much of that total is actually outstanding.

What’s more, as delinquencies rise — and they will because of the weakness of the economy — credit-card issuers will take steps to stem the tide. That will include cutting credit off from problem borrowers and tightening restrictions on new cards.

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14 comments

  1. EvilHenryPaulson

    From memory,

    Normally AXP changes rates for 20% of cards annually. Usually 5% downgrade 15% upgrade. Recently 10% downgrade 10% upgrade.

    American Express, Discover, MasterCard all have their own money invested in the credit.

    American Express is smaller/more vulnerable, but takes better care of its portfolio and goes for more lucrative/lower risk customers.

    Visa is owned by member banks, only takes processing charges and banks are responsible for 100% of credit

    This problem is international, Turkish people have gone from no credit to some of the biggest users in the world.

    Some American CC facts, http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php
    Stats of American CC debt crowdsourced by those seeking debt counselling
    http://plasticeconomy.com/stats.php

    I’ll venture a guess that whatever market position BoA, JPM, and Citi have going forward — they also don’t have what I expect to be record CC writeoffs. Even with the new bankruptcy law, they will have to resell the debts to collection agencies. If they default on CCs in this environment, there is likely no way banks can bleed a stone.

    Any corrections?

  2. EvilHenryPaulson

    … big 3 don’t have the upcoming CC losses baked into their valuation

    … Turkey is relevant for their high adoption of CCs and the problems they are causing on a broad level

  3. EvilHenryPaulson

    … finally there is some uncertainty because CC companies keep the costs of fraud a closely guarded secret, and they are not insignificant. They are already operating on thin margins that require packaging debt for the money markets. If the US suspends backstopping money markets the banks can’t self-fund them at current practical rates. If they see losses, they’ll be forced to dump the traditionally profitable likely to default customers at expense of their market share (or at least lower limits, add more fixed fees).

    (sorry did not mean to hit enter that last time)

  4. Anonymous

    Even though credit card defaults are smaller than mortgage defaults, when the public gets their cards pulled they will take out any cash they currently have in the bank, putting further pressure on local banks, not just the credit card banks.

  5. Anonymous

    Credit card limit downgrades have a big effect on credit scores! The big three factors are prior defaults, credit outstanding, and debt to limit ratios. Downgrade the limits and you downgrade the credit, substantially, triggering other companies to downgrade, etc. A simple limit cut can have a cascading effect on a swath of card holders without so much as a single missed payment!

  6. anon3

    So credit card issuers may be showing lower losses than they otherwise might because other lenders are taking the hit…That may be about to change.

    I don’t get it Yves. How does this Marketwatch debunk your [apparently correct] theory that credit card losses are low because of lender protection? Are you saying that the cc’s basically are senior to other creditors? And if so, what tells us this crisis will be so bad that it will reach them in this size?

  7. gomad361

    Visa Inc. is a public company (except in Europe which opted out of the March ’08 IPO), the ex-”member banks” are still the major share holders but anyone can buy a share or two if they wish V : NYSE.

  8. doc holiday

    I really hate junk mail and get amazing amounts of credit card garbage (offers) everyday, so IMHO, if these crooks still have money to give to the post office to deliver this garbage — then they do not have a credit problem, they have a predatory lending problem!

  9. satan

    I do not think that credit cards will be able to collect debts. People have lost all faith in the justness of the system and they are broke. This is going to be interesting..

  10. satan

    Credit rating agencies, both public and private, have been so wrong that no sane person will believe FICO scores and credit ratings anymore.

    I think we might be on the edge of a debtor “uprising” of the kind we have never seen before. All models based on historical data and past consumer behavior/ attitudes is useless for predicting the future. We have never been in anything remotely similar before.

  11. Cash Mundy

    Thanks for the heads-up, came in mighty handy. We Evil Shorts was a-fixin to get bored with knocking over banks and such, but credit card companies? You mean those people who send out all that annoying junk mail? The ones I saw advertising on TVs at local bus-shelters? (them TVs is long-gone: I reckon the local prison-population XXXXX-XXXXX downtown bus-riders did for’em right quick.) The ones who kept sending my pizza-drivin’ friend, now surfing disability, card after card? (She used them to go long on silver with, then went bust.)

    Those People?

    +MAPR, +AXPPT and +VOJ is what this here Evil Short has to say about those people…

    Suerte y buen provecho, amigos y amigas!

  12. fatbear

    And let us not forget car loans/leases – many loans are equiv to sub-prime (72 months with roll-in of balance on old car, and rapidly deteriorating collateral), and the leases may be even worse (SUVs, etc., with re-sale value FAR below what’s baked into the lease bonds) – this hits bondholders, banks, and GM/Ford/Cerberus

  13. Marlene

    Banks and finance companies will keep making money with credit card interest rates that are comparable to payday loans. The American consumer loves to spend money and with housing prices at all time lows, home owner equity has dropped dramatically. We operate and educate consumers about credit card debt and can be reached at creditcarddebt.org

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