Banks must brace for creditcard pile-up

July 7, 2009

Credit card delinquency figures bring to mind the rock classic “You Ain’t Seen Nothing Yet.”

Ever after today’s record report — delinquencies jumped to 6.6 percent of all card debt in the first quarter from 5.52 percent — the peak may still be far off.

The sunniest forecast in the Obama administration’s stress test suggested that credit card loss rates for banks would climb to between 12 and 17 percent in total over the next two years. This assumed an unemployment rate averaging just 8.4 percent in this year. Based on the gloomier scenario of 8.9 percent joblessness, the two-year write-off climbs to 20 percent.

As we race past the government’s worst assumptions, the risks mount that consumer distress will plunge the banks back into crisis. Despite recent rising profits, bankers will need to make sure that their seat belts are fully fastened for the turbulence ahead.

The dismal job market bodes ill for default rates. The United States is continuing to hemorrhage jobs at an unexpectedly rapid pace. It would take only another few months of job losses at last month’s rate to push unemployment above 10 percent, according to Decision Economics. If June’s payroll loss is sustained — an unlikely but possible outcome — unemployment would climb to 11 percent in less than six months.

Credit card issuers may also be dismayed that once Americans lose their jobs they are taking ever longer to find new work. The share of the jobless without work for more than six months is up to almost 30 percent — the highest level since records began in 1948.

While many people can continue to service their debts for a couple of months, half a year of unemployment can cause all but the most prudent saver to default. Benefits replace roughly half of previous wages, according to the Economic Policy Institute in Washington. A report issued Tuesday by Standard & Poor’s indicates that the loss rate on credit cards has risen faster than joblessness over the past six months.

It’s not just the unemployed that will find themselves increasingly stretched. Wage deflation is now a real threat — magnifying the challenge of servicing debt. Weekly earnings fell at an annualized 0.6 percent in the three months to June. This may help explain why an increasing number of Americans are late even in paying their home equity line of credit — usually a priority for those who want to keep their homes.

America’s banks have at least had a little time to buckle up. The Federal Reserve warned the top 19 banks to brace for losses of up to $600 billion. The more vulnerable have raised extra capital to cushion themselves and with the yield curve so steep even the dullest bankers can produce strong profits.

Even so, at current trends the banks will need all their energy to keep ahead of rising defaults. It is increasingly clear that the bank stress tests were not stressful enough.
(Editing by Martin Langfield)

40 comments

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the only reason why i may default on my credit card is because the bank raised my interest rate from 7% to 23% even though i have never been late on a payment. This has placed the minimum payment above what i can afford, so they are digging their own graves

Posted by joseph | Report as abusive

I agree with Joseph. Interest rate hikes (my card was hiked from 7% to 12% without my missing a payment) are contributing to the default rate. It wouldn’t be surprising if banks were planning to use the high default rates to argue that they should get an undeserved further share of bailout money.

Posted by Paul | Report as abusive

In my opinion the company’s that offer young people that have NO idea how to handle credit have MULTIPLE cards….they are asking for trouble!! I only have 2 credit cards and I MAKE the bank keep my limit very low (for several reasons) and my way of thinking…if you can’t pay cash for it…you probly don’t need it!

Posted by Kathy | Report as abusive

Yeah well too bad for the banks. Bank of America has decided to take a customer with outstanding credit, a perfect payment history and rose my interest rate on my card from 9% to 21% with the option to opt out of the rate increase and go back to your original rate. The caveat is…if you use the card at anytime the rate will jump back up to the new 21% rate. So I’m not too sympathetic for the banks with tactics like that.

How are consumers supposed make their payments if their payment amounts per month are increased due to an interest rate increase. Why hasn’t anything been done to prohibit that practice from Washington?

Posted by JF | Report as abusive

Yes that is true my credit cards went from 7% to 31% I was never late on my payment paid more than the minium due maybe not every month but most months when I called to ask why they did this they said because we can. I was out of work for over 6 months and really struggling this was the last thing I needed I am now going to file bankruptcy.

Posted by Margaret | Report as abusive

I’m riding a fine line in that my expenses equal my income, no disposable cash at all. So far I’ve been able to keep them low thru balance transfers but those are harder to come by. Should my interest rates rise that would be enough to cause me to default. If I become unemployed it’s a no brainer.

Posted by John | Report as abusive

Anybody that can’t meet a minimum payment because of a rate change needs to alter their lifestyle so that they are not relying on debt to live.

Banks are taking a risk lending in this environment. I don’t blame them at all for wanting to make sure their risk pays off.

Posted by capitalkid | Report as abusive

As noted by MOST of those above, we have no need to cry for the banks and credit card companies. I was late by 3 or 4 days, not 3 or 4 months and the finance charge rate jumped to 29.9% !! If I must, I’ll pay the late fee but the percentage rate should be capped. Even at 15%, the bloody banks will make plenty of money.

Posted by Bonnie | Report as abusive

I agree with above. The banks have been digging their own graves. They had a chance to give out low interest rate mortgages to people with great credit scores and seemingly stable jobs. What did they do? Keep them at 5.00% (well 4.75%)When they could have easily afforded a 4.00% or lower interest rate. (still can) They are being greedy. They also have a rule, that you must first pay off a low interest loan before a high interest one can be payed off. I am simplifying it of course, but if you have two loans, one at 7% one at 23%, you have to pay off the 7% first. Sheer idiocy! People should pretty much rebel against that behavior. Obama started writing up a consumers bill of rights against credit cards (which exist in various European countries) but i think it stalled?

Posted by john | Report as abusive

Use credit cards for whatever kickback offers they offer. Pay bills on time. If one does not buy stuff one cannot afford, then ridiculous interest rates do not come into play! Debtors prison was never economic; they had to feed you at least once a week.

Posted by Wallenstein | Report as abusive

Mr. Swann writes: “If June’s payroll loss is sustained — an unlikely but possible outcome —” Why is it unlikely? Based on what?

If you pay off your credit card there is no interest at all, regardless of your rate. You can whine all you want but if you don’t like the rate then don’t borrow the money.

Posted by brad | Report as abusive

I agree that the banks are digging their own grave. I was set up with BoA to pay my Credit card off at 5% interest with automatic withdrawals taken from my checking account. They called me up to inform me that the rate was going to 29% because I did not call them to tell them to continue making the automatic withdrawals. They also informed me that they waited until two payments were missed because that enabled them to hike the rate up. I protested to no avail. I find it interesting that they do this and force people into situations that they cannot get themselves out of while it is our tax payer dollars that enable them to remain in business. The “Best and the Brightest”?? Obama should have given me the TARP money, I would have paid the card off, be debt free and the banks wiould in return would have had their money paid in full. How about the Worst and the Dimmest?

Well. Its all business. As much as corporations don’t want to admit it their lying and treachery have eroded the trust that business has been based on over the years. Consumers have no choice other than to look at dealing with these companies as a business relationship. A business has no “bad feelings” when they walk away from a bad business relationship and now consumer’s don’t either. If consumer’s can’t have income from a job they have no qualms walking away from their debts just like any business would.

The funny part is the cut throat corporate CEO types have dug their own graves in this case as the “stupid consumers” have become more savvy about their business relationships. In order for this situation to go back to normal big companies are going to have to stop screwing, lying to and generally cheating and stealing from their customers.

Business people need to realize that the economy is an ecosystem of sorts. If you do stupid things like take a dump in your own backyard (Outsourcing is a good example of this) something is going to come back and harm you in the long run. Just like in an ecosystem with disease and elimination of waste joblessness and underemployment can come back and kill big companies that profited from outsourcing.

Posted by richard hasse | Report as abusive

It’s the price you pay for borrowing money – don’t like it? Pay cash – cash is king! Credit cards are evil!!!

Posted by Jooby | Report as abusive

Over the past decade, interest rates have gone ridiculously low and minimum payments even lower. With these low rates and payments, people still managed to get themselves into more debt than they had ever been before, and many of them started running into serious problems paying back their debt even before all these rate hikes and min pay increases were put into place. This is important to remember, because the aforementioned changes taking place in banking are a result of all this financial irresponsibility, not a cause of it.

Anyone who says banks made ‘tons of money’ even at 15% APR, so they shouldn’t need to go to 30%, needs to question why so many banks are going under. Sure, bad lending decisions have been made in the past, and banks have given far too much money to those who were not credit worthy, but none of those bad decisions would be bad if people were in control of their finances to begin with.

I am a solid liberal, but instead of capping fees, stopping APR increases and regulating every aspect of the banking industry, there needs to be a much higher level of importance put on financial responsibility on the individuals part. It’s sad that people with perfect payment history’s have to have their APR’s jacked up because of the faults of others, but the solution isn’t to yell at the banks, it’s to teach your kids and friends how to manage their money- something I think is hapening at a digustingly slow rate right now.

Posted by Jason | Report as abusive

Everyone should stop using credit cards for everyday purchases as we all pay a premium for credit card use even if we pay cash. The CC companies charge 2% to 5% of the purchase to the vendor for CC transactions. So, the vendors have to build that into their price structure. Remember, when gas companies wanted to charge more for purchases with credit card? Well, you don’t hear about it anymore because they just built it into the margin instead. Same thing in grocery stores, retailers and restaurants. We all pay extra for credit card users. And that is on top of what the CC issuers get out of the cardholders. Where do you think the money for all of the multibillion dollar banks and their fat profits and bonuses come from. From the cardholders and all of the rest of us – even if you pay Cash! And the well-off people who can afford to take advantage of all of the bonus points and cashback offers just add on to the overall prices that everyone pays. Wise up people. Cut your credit card addiction and save everyone money.

Posted by CAL | Report as abusive

I have a fixed rate on the amount due on my Chase card until that amount is paid off. However,next month they are raising the minimum due from 2% to 5% of my balance each month which means my payment goes from $350 to %900.
I’ve been with Chase for 10 yrs.,never had a late payment & paid more than the minimum due each month.
I agree with Joseph, the banks are digging their own graves!

Posted by pat | Report as abusive

JF asks, “Why hasn’t anything been done to prohibit that practice from Washington?”

Why do we have all these different credit cards anyway? What we need is a single-creditor system – one credit card issued by the government instead of all these different banks with all their different rules, interest rates, fees, etc.

Posted by Ima Doofus | Report as abusive

well in my opinion if we feel the need to use credit cards well beyond our means, we need to think about the long term consequences. although if someone has been paying 7% for xxx time, then the bank decides to up the rate to 20+%, the bank should allow the good standing customer to keep the rate on the previous balance. if the rate shoots up, then once it shoots up, any purchases made after that date will reflect the higher interest rate. at least that way you can’t say it’s not fair.

nothing is fair these days. but we live in a capitalist country and it’s all about making money. the good standing credit users are paying for those defaulting. it’s a sick cycle…

Posted by sirdebo | Report as abusive

I’m always amazed at how many people run up huge credit card debts, even though they are employed amd making an excellent living.

People have to have that big flat panel tv or expensive new car for me me ME, and not later, when they can save up for it, but now now NOW. You have to keep up with what buddy down the street has…

I agree that cash is king, don’t buy unless you can afford it – but it’s so difficult after eating out 5 days a week & buying cigarettes and beer – ya know???

;-)

Posted by Rob | Report as abusive

Wait til you get hammered by the invisable FICO gods. Talk about a flawed system that controls our lives! Obama needs to look into this! Example: Got profit sharing money, paid off two accounts…responsible, right?…wound up being penalized for it!! Paying them off wiped out my positive debt ratio, making my FICO score plummet approx. 100 points in one month. How’s that for screwed up????!!??

Posted by RetroRon | Report as abusive

Our Chase card notified us that due to inactivity in our account, that our rate was being raised by a huge amount. We had been paying more than the minimum balance, on time, were never late. But this was not good enough. Since we had the option to cancel the card immidiately and start paying the balance off at the old, much lower, rate, guess what we did?

We have a few other credit cards but have been paying cash now for the last year. It is liberating to finally be taking control of our finances. The credit card companies/banks are not your friend.

Posted by Mark | Report as abusive

[...] Banks Must Brace For CreditCard Pile … [...]

I am in agreement with those who are outraged. It’s important to remember, though, that from time immemorial, finance and political power have been inseparable. If at any point (and it happens) one is duped into believing otherwise, one is drinking the Kool-Aid.
At this point the supposedly populist administration has, just as have all previous administrations, everything it possibly can to help out their friends in the financial community. The Clintonistas were Yuppie Scum, sending jobs abroad and rewarding themselves with huge consulting fees for doing so. The Bushies were the Friends of All Big Money But Especially Unearned Money. Everyone does the money dance. It’s about power and greed. It’s what humans do. Don’t underestimate the greed of the ‘Average Joe or Jane’, either. Everyone criticizes the government for being wasteful but then votes for their representatives for bringing them the goodies to their district — polls over the years consistently indicate the populace things government is terrible but that their particular representatives are just swell — doesn’t quite add up, does it?
The wild card is that these periods of Babylonian excess are generally followed by catastrophe and a shuffling of the cards: A populist revolt, or a leftwing tyrant or a rightwing tyrant, or something of that sort. Rather like a war it’s rough on people but shakes up the system — perhaps it’s more like a forest fire than a war in that sense, I suppose.
Look, it’s fairly clear at this point that the False Spring of the economic downturn ‘not being so bad after all and it’ll get better soon’ has indeed been a false spring and the serious reckonings are yet to come.
Sharpen your guillotines, people, the economy will in due course enter the Land of Dragons and in that uncharted territory we get to find out who’s really tough.
The financial interests are scrambling for position, and if you can tell the difference between the financial interests and the political interests then you have a sharper eye than I do, because they all look the same to me, whether they call themselves Dems or Republicans, Liberals or Conservatives.
Fracture lines are beginning to show, though.
Take a number for your seat beside the guillotine . . .

Posted by snarksarenotboojums | Report as abusive

If you don’t buy things that you can’t afford,then you don’t carry a balance on the credit card and you don’t pay interest (which can not be increased).

The credit (or debit) card is a tremendous convenience. You don’t have to write checks and you can order things on line and through the mail. There is no charge at all as long as you pay the BALANCE PROMPTLY as soon as you get the bill. The problem comes when you charge things you can’t afford and can’t pay the balance or worse, can’t make the minimum payment on time. Then you get exessive interest AND late charges.

It feeds on itself as the balance continues to grow.

Posted by JIMBO | Report as abusive

Paying cash as your parents and grand parents did means No Credit Card Debt.
No interest charges, no over draft or over limit charges and best of all your debt free. Try it you will like it.

Posted by Pobept | Report as abusive

[...] Now raising intellectual capital – Reuters Blogs tweetmeme_url = [...]

Having just finished up graduate school, my wife and I are swimming in credit card debt. I went to graduate school because the job market after getting my bachelor of science degree was pitiful (back in 2006). In 2008 I had a Master’s, and the job market was even worse. My wife and I pay rent and all the bills we can with cash. We buy groceries with credit, I bought text books with credit, we have paid medical bills with credit (on account of not being able to afford insurance). I have a temporary contract job with the government, and have applied to 3-12 jobs every week for over a year now. My wife has a college degree and lost her job before she even started (the school she was supposed to teach French at didn’t open due to budget constraints). She now pours coffee for a living. For folks like my wife and I, credit cards are the blessing and the curse in this terrible economy. But it’s quickly shaping up to be a curse as we still can’t find work. So much for that Master’s…

Posted by Casey | Report as abusive

Just some of the benefits of living in the Union of Corporate Capitalist Republics, the former-USA.

Posted by Otis | Report as abusive

Does anyone else have the sense that, having seen the collapse of the Communist system in the USSR some twenty years ago we are now seeing the collapse of Capitalism As We Knew It here in the USA?

That so far we’ve only gone through the first phase?

Or am I alone in this?

Posted by TiggerIzAway | Report as abusive

I would agree with the writer. We are in for a wild ride. I hope the banks have their piggy bands full, because it might get down to the last couple of nickels.

Greed is the culprit, and politicians who failed to set rules for financial institutions are going to have to take their lumps also.

I was concerned about the first aftershock, but this one could be a lot worse than the first.

Posted by f belz | Report as abusive

I believed the only way to solved this CC mess is by having a strong financial education. And i don’t mean getting an MBA / CFA. Start young and read up on books that teaches financial literacy. Over time, you’ll develop a debt free / get rich mind set. I hope this simple advise helps.

Posted by Wes | Report as abusive

The system needs fixing- big time..several years ago, I got 4 or 5 credit cards while unemployed.. they never checked whether I was employed or not.

Posted by marlyn | Report as abusive

We are in an era of Debt. It is more profitable to hold Debt than Cash. Anyway, one can always choose to walk away from the Credit Card debt, and let the Bank and Taxpayers take care of it.

Posted by Stephen | Report as abusive

Another twist in this story, that really shouldn’t surprise the informed, is similar to their so called “stress tests”, ALL their numbers are too low.

Last week, on a national radio talk show, it was mentioned that the “actual” unemployment is slightly under 17%, when the unreported & those who’ve given up, are considered….thus, even your numbers are very liberal.

It’s much worse than they’re willing to admit and once again choose to live in denial rather than disclose the truth, for fear of causing a panic.

Posted by StevenG | Report as abusive

Basically, the people are doing what the corporations, banks, and Governments have been doing for years.. living off fraud. And paying the FED through taxes, for the pleasure of being in this mess. Awesome!

Posted by Thomas | Report as abusive

I’ve been in the process of eliminating my credit card debt since the beginning of the year. I cancelled my Amazon.com VISA and American Express credit cards in April and I have $6,400.00 remaining on my Chase Freedom VISA card. I hope to have it paid off by the first quarter of 2010 and then I’m going to cancel that card as well.

I’ll have one credit card left, which I can use for on-line purchases, travel, etc. when necessary, but with no carried balance.

I’ve been using cash for purchases for months and if I cannot afford something, I don’t buy it. I’m looking forward to being debt-free in early 2010. The credit card trap is easy to fall into, but extremely difficult to escape.

Good luck to everyone struggling to escape the credit card trap with me!

Posted by Lisa | Report as abusive

One of the great things about unemployment is there’s so much less traffic on the freeway!

Posted by MC | Report as abusive

Please get something through your heads. The banks were NEVER your friends, never will be. Wall Street is NOT your friend – it is a distribution machine to distribute the publics’ money to the investement bankers. We are in for a hard rain my friends – the sheer stupidity and greed of the last 20 years is going to be paid for. Almost every person reading this has never been through really tough times – our parents were not stupid – they learned from the great depression. Hopefully, the only good thing to come from the current and coming massacre will be that people will finally adjust their values back to hard work, savings, simple pleasures and spending within your means – that is the way it is supposed to be. Good luck to all.

Relax. The movie is almost over.
The end of the empire is close.

Posted by Douger | Report as abusive

Obama is looking at another bailout. Maybe he should just payoff all the credit card debt so we actually get to see the direct results!

[...] JHB up in Montana sent this: Banks must brace for credit card pile-up [...]