Credit Card Defaults At 20 Year High
By Justin Gardner | Related entries in Banks, Economy
Too much easy credit, not enough income and scant capitalization have created yet another perfect storm.
AmEx, the largest U.S. charge card operator by sales volume, said its net charge-off rate — debts companies believe they will never be able to collect — rose to 8.70 percent in February from 8.30 percent in January.The credit card company’s shares wiped out early gains and ended down 3.3 percent as loan losses exceeded expectations. Moshe Orenbuch, an analyst at Credit Suisse, said American Express credit card losses were 10 basis points larger than forecast.
In addition, Citigroup Inc (C.N) — one of the largest issuers of MasterCard cards — disappointed analysts as its default rate soared to 9.33 percent in February, from 6.95 percent a month earlier, according to a report based on trusts representing a portion of securitized credit card debt.
“There is a continued deterioration. Trends in credit cards will get worse before they start getting better,” said Walter Todd, a portfolio manager at Greenwood Capital Associates.
How many of you have had the credit card companies cancel your accounts because you weren’t using your cards? I know I have, and usually they just send you a new card.
The game is changing, but, honestly, thank god for that. Credit shouldn’t be easy to get. People shouldn’t be allowed to easily fall into debt. That should be hard. Because our economy doesn’t grow in any credible way if people are overleveraged to the hilt and too much anymore we’re hearing that people carry an average credit card debt of $10K…which is crazy.
More as it develops…
This entry was posted on Tuesday, March 17th, 2009 and is filed under Banks, Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
March 17th, 2009 at 10:33 am
I have serious issues with credit card company practices, as well as with how they talked congress into making bankruptcy harder. CC interest rates upwards of 20% are what allow CC cos to chug merrily along with high default rates. And they’re what allows these companies to act with utter disregard for the actual creditworthiness of their customers.
Some folks have amassed large debts by using credit cards as costly last resort options in emergency situations. But make no mistake, most folks who dug themselves deep into debt did so by using credit cards to finance a lifestyle more comfortable (profligate?) than their income dictated. By and large, I have precious little sympathy for such folks.
So I have a bit of a problem with your choice of the word “allowed” in the sentence I blockquoted above. How paternalistic shall we be towards our fellow Americans as we seek to “fix” this? I am reluctant to zealously big brother the consumer credit industry, so I think any fixes should be judicious and minimal.
One possible fix thats seems reasonable is to place a cap on the interest rate that credit card companies are allowed to charge which can only be exceeded via a highly scrutinized process. If credit card companies can only charge, I dunno, let’s say 8% over prime, just to pick a number out of my butt, that would mean that these companies would actually have to scrutinize potential customers.
Justin, I wonder how you reconcile not “allowing” folks to fall into debt with your repeated contention that the health of the economy must rest on consumer spending. If debt-funded consumer spending is hacked back by various regulations, then the rebound of economy as you conceptualize it would be SERIOUSLY delayed. Where do you envision drawing some regulatory lines given that you feel that growth of consumer spending is essential for American economic health?
March 17th, 2009 at 5:40 pm
For decades I’ve gotten 2-3 credit card offers per week (even during periods when I was unemployed for several months). For what it’s worth, I never returned any of them. I haven’t seen one in several months now, even though my re-payment record is still perfect.
If nothing else, the amount of paper I have to put into the recycling has dropped, which is certainly a plus.
March 17th, 2009 at 5:56 pm
It wouldn’t be an overstatement if we are assuming the bank has freeze the issuance of new credit.
And the are proactively reducing exsiting credit that deem to be high risk.
To prevent your credit score/rating suffered from the credit limit cut, it is advisable to use onyl 30% of the credit limit available for a card.
March 17th, 2009 at 8:00 pm
Justin, I wonder how you reconcile not “allowing†folks to fall into debt with your repeated contention that the health of the economy must rest on consumer spending.
Holy crap, Batman. I actually agree with Krispy Kitty!
“It’s the end of the world, as we know it….it’s-it’s the end of the world, as we know it…and we all feel fine…
March 18th, 2009 at 7:12 am
It seems a bit disingenuous to raise card interest rates, raise the minimum payments on the cards, and then blame the increase in defaults entirely on too much easy credit and not enough income. Many people, however wrongly, believe that they entered into an agreement with the credit card company that works both ways. If the company does not see fit to hold up their end of the original agreement (this is your “fixed” rate, this is your minimum payment, this is your credit limit), many people may not feel obligated to hold up their end either (even though they agreed to the terms) when all three of these are changed because the credit card company switched to a new “risk model”. By defaulting, consumers are effectively switching to a new risk model of their own.
I’m not defending default, or implying that it is not the individual’s responsibility to use credit responsibly. The average person, however, sees this crisis in simpler terms: what is happening in my life? My income, my job, the way I use credit – nothing has changed, and yet my interest rate skyrockets, my credit limit slashed without advance notice, and my minimum payment is cranked, all because the banks have lost a lot of money playing around with exotic financial vehicles I’ve never heard of before. True or not, that appears to be the “conventional wisdom” that has been filtering down. The reality is that the reactions of the credit card companies themselves to a crisis created within the financial sector have pushed more people towards default, which I would think would be the last thing that the credit card companies would want.
March 18th, 2009 at 7:38 pm
wj, did you notice that the number of “pre-approved” credit card offers showing up in your mailbox increased enormously after the stricter bankruptcy regs passed a few years back? I did.