The report by Capital One on a marked increase in credit card chargeoffs to an eyepopping 9.33% is more significant than it might seem. First, the absolute number is simply a stunner in an economy where unemployment is far from peaking. Second, Capital One was widely regarded in the industry as a savvy credit card issuer, tightly run, with good credit models. Then again, I wonder if their reputation was in fact based on product design. In the days when just about every financial player was junking up my mailbox with credit card offers, Capital One’s were far and away the worst (small credit lines, most often with a requirement that you open a bank account with close to the amount of the credit line as your opening balance. And I never got much further, but I suspect those accounts had minimum balance requirements not much below that required to get the card.
Now I do not know if the offers I got was representative of their product line, but I was always a bit perplexed to get these offers, that would make sense only if you had a great deal of getting a credit card, since I have a good FICO and live in a high rent district. I would sometimes puzzle what mailing list I was on to get targeted for these offers.
The point of that story s that a chunk, probably a big chunk, of Capital One’s business was targeting higher risk borrowers, However, with credit card marketing so skewed to create borrowers dependent on credit, the industry set itself up for this outcome. Indeed, as we noted earlier, they became even more aggressive in pursuing weak borrowers in the wake of the 2005 bankruptcy act, assuming it would enable them to extract blood from turnips. Even American Express, heretofore also held in high esteem for the supposed sophistication of its credit scoring and management, and generally targeting affluent customers, is showing chargeoffs not much lower than Cap One (note these two issuers have released March stats, but industry averages for the month do not yet appear to be available)
Separately, however, while the level of Cap One’s pain may be a bit more acute than that of other credit card issuers, the bump up in losses will probably prove typical.
From the Financial Times:
Concerns over US credit card companies grew on Wednesday as Capital One Financial, a leading issuer, said its credit card loss rates were exceeding the unemployment rate.
Credit card writedowns have topped the jobless rate on a handful of occasions in the past, and only once by any significant margin. That was in 2005 as a flood of borrowers entered bankruptcy and wrote off their credit card debt before the passage of a law that made it harder to file for bankruptcy.
Credit card loss rates have in the past closely tracked the rate of unemployment. But in this recession that relationship is breaking down. Economists say this is because job losses, which pushed rates to 8.5 per cent in March, have compounded other sources of distress such as housing woes and stock volatility.
Meanwhile, as the recession has deepened, bankruptcy filings are once more approaching pre-2005 levels, contributing to the rate of credit card losses.
Capital One said its net charge-off rate for US cardholders – debts it believes it will never collect – rose to 9.33 per cent in March, up 1.27 percentage points in one month. It said some of the increase was because February has fewer days. Adjusted, the US card charge-off rate would have been 9 per cent in March…American Express …. reported that credit card losses of 8.6 per cent in March were offset by the sale to third parties of some previously written-off card loans.
Brian Shniderman, head of the US credit card practice at Deloitte, said job losses had a “ripple effect” on the credit card business as even consumers who still had jobs adjusted how often and how much they spent….
US credit card charge-offs soared in February to 8.82 per cent, a record in the 20-year history of Moody’s credit card index. Moody’s predicts the charge-off rate will peak at about 10.5 per cent in the first half of 2010, assuming a peak in the unemployment rate of 10 per cent.