Credit Card Debt Default
http://creditfederal.com/article/articles/620/1/Credit-Card-Debt-Default
By CreditFederal.com - A good or bad credit personal loan, auto and mortgage financing, and credit card resource.
Published on 01/13/2009
Interest rate hikes to offset high risk may be increasing credit card debt defaults and worsening the credit crisis. It's like an unsecured loan version of the mortgage mess. For debt relief, consider a debt settlement chargeoff, credit counseling or an unsecured debt consolidation loan.
High Risk Bad Credit Credit Card Default to be Next Crisis
The subprime mortgage industry woes were just the beginning, now high risk, bad credit card defaults may eat up company profits and spread to other financial sectors.
Just like the mortgage mess, credit card users are falling behind on payments, defaults are rising, and the outstanding balances due are ever-mounting as investor losses worsen.
The $950 billion worth of outstanding credit card debt is bad news for big participants like JPMorgan Chase and Bank of America. Consumer debt is already beginning to overflow into other financial markets, further weakening the U.S. economy.
For credit card debt relief, consider credit counseling or a debt consolidation loan.
Beyond help? Learn the facts about a credit card chargeoff, how to negotiate a debt settlement, or download free bankruptcy forms to file.
"The next meltdown will be in credit cards," says Gregory Larkin, senior analyst at research firm Innovest Strategic Value Advisors. Adds William Black, senior vice-president of Moody's Investors Service's structured finance team: "We still haven't hit the post-recessionary peaks [in credit card losses], so things will get worse before they get better." What's more, the U.S. Treasury Dept.'s $700 billion mortgage bailout won't be a lifeline for credit card issuers.
Some are preparing, such as JPMorgan which last year started reaching out to troubled borrowers to set up payment programs and make other adjustments to accounts. JPMorgan spokeswoman Tanya M. Madison admits: "We have seen higher credit card losses. We are concerned about [it] but believe we are taking the right steps to help our customers and manage our risk."
Some banks; however, may be deepening their problems. To boost profits and get ahead of forthcoming regulations, they're increasing interest rates to make up for losses but that action is actually making it worse, as it makes it harder for consumers to keep up with the growing debt balances. Innovest estimates that credit card companies will take a $41 billion hit from defaulted debt this year and a $96 billion loss in 2009. And then those losses will work their way through the $365 billion market for securities backed by credit card debt.
Although the credit card market is a mere fraction of the $11.9 trillion mortgage market, all of its debt is unsecured, meaning consumers don't have to make down payments when opening up their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit card companies to recoup. With secured debt; such as mortgages, some banks are protected both by down payments and by the ability to recover at least some of the money by selling the property.
Making matters worse, the subprime bad credit threat is also more notorious with credit cards. High risk borrowers with bad credit scores account for roughly 30% of outstanding credit card debt, compared with 11% of mortgage debt.
Credit card losses are already taking a bite out of lenders' balance sheets. Bank of America, the nation's second-largest issuer behind JPMorgan, revealed that roughly $3 billion of its $184 billion credit card portfolio has soured, a 50% increase from a year ago. At the same time the bank, which is also dealing with the broader financial tumult, said it would have to cut its dividend by 50% and raise $10 billion in fresh capital. The stock stumbled more than 25% the next day when investors largely scoffed at the new shares BofA was offering. "The good news for us is that we have the strength to get through this, but the bad news is that the earnings recovery does take a while," says BofA spokesman Bob Stickler. "We are prudently adjusting our underwriting standards to adapt to changing economic conditions."
Even American Express; which favors better credit customers, upped its provisions for credit card losses from $810 million to $1.5 billion, indicating upscale consumers are also having troubles. "We have enhanced our credit models and continue to prudently manage our risk by scaling back some card acquisition efforts and reducing credit lines where appropriate," says an AmEx spokeswoman.
The industry's practices during the lending boom are manifesting problems now for credit card lenders. A former call center staffer at MBNA, the big issuer bought by Bank of America in 2005, stated her job was to develop a rapport with credit card customers and advise them to spend more of their available credit limit.
As credit card companies expected, now regulators and politicians are trying to curb some of the industry's abusive practices by limiting interest rate hikes, abolishing certain fees, and cracking down on questionable billing practices. Under rules proposed by the Federal Reserve, a borrower would have a 21-day grace period before being hit with a late fee, instead of the few days offered by some firms now. A similar plan working its way through Congress would allow banks to increase rates only on consumers' future purchases—not existing balances. And under both proposals, credit card companies would have to allocate account holders' payments equally to balances with different interest rates. Currently, firms first apply payments to the debt with the lowest rate, which means it takes longer and makes it costlier for consumers to pay off their debt. The Senate isn't expected to vote on the matter until early next year. The Fed's rules, currently being reviewed by the industry, could take effect around that same time. But lenders seem to be preparing for the worst-case scenario: an outright ban on some practices.
To get ahead of rules that would hamper their ability to reprice accounts, for example, many firms are jacking up interest rates. A survey of major issuers by consumer advocacy group Consumer Action found that 37% of firms have raised rates across the board, even for borrowers with relatively pristine credit records. "In anticipation of a federal crackdown, card companies are scouring their portfolios and tightening credit," says Tower Group's Moroney.
Even a consumer who misses just one payment can suffer an interest rate hike by their card company, but again that may end up causing worse default problems for card companies as people fall further behind on their accumulating debt.
View national; by county, mortgage and credit card debt delinquency rates.
Just like the mortgage mess, credit card users are falling behind on payments, defaults are rising, and the outstanding balances due are ever-mounting as investor losses worsen.
The $950 billion worth of outstanding credit card debt is bad news for big participants like JPMorgan Chase and Bank of America. Consumer debt is already beginning to overflow into other financial markets, further weakening the U.S. economy.
For credit card debt relief, consider credit counseling or a debt consolidation loan.
Beyond help? Learn the facts about a credit card chargeoff, how to negotiate a debt settlement, or download free bankruptcy forms to file.
"The next meltdown will be in credit cards," says Gregory Larkin, senior analyst at research firm Innovest Strategic Value Advisors. Adds William Black, senior vice-president of Moody's Investors Service's structured finance team: "We still haven't hit the post-recessionary peaks [in credit card losses], so things will get worse before they get better." What's more, the U.S. Treasury Dept.'s $700 billion mortgage bailout won't be a lifeline for credit card issuers.
Some are preparing, such as JPMorgan which last year started reaching out to troubled borrowers to set up payment programs and make other adjustments to accounts. JPMorgan spokeswoman Tanya M. Madison admits: "We have seen higher credit card losses. We are concerned about [it] but believe we are taking the right steps to help our customers and manage our risk."
Some banks; however, may be deepening their problems. To boost profits and get ahead of forthcoming regulations, they're increasing interest rates to make up for losses but that action is actually making it worse, as it makes it harder for consumers to keep up with the growing debt balances. Innovest estimates that credit card companies will take a $41 billion hit from defaulted debt this year and a $96 billion loss in 2009. And then those losses will work their way through the $365 billion market for securities backed by credit card debt.
Although the credit card market is a mere fraction of the $11.9 trillion mortgage market, all of its debt is unsecured, meaning consumers don't have to make down payments when opening up their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit card companies to recoup. With secured debt; such as mortgages, some banks are protected both by down payments and by the ability to recover at least some of the money by selling the property.
Making matters worse, the subprime bad credit threat is also more notorious with credit cards. High risk borrowers with bad credit scores account for roughly 30% of outstanding credit card debt, compared with 11% of mortgage debt.
Credit card losses are already taking a bite out of lenders' balance sheets. Bank of America, the nation's second-largest issuer behind JPMorgan, revealed that roughly $3 billion of its $184 billion credit card portfolio has soured, a 50% increase from a year ago. At the same time the bank, which is also dealing with the broader financial tumult, said it would have to cut its dividend by 50% and raise $10 billion in fresh capital. The stock stumbled more than 25% the next day when investors largely scoffed at the new shares BofA was offering. "The good news for us is that we have the strength to get through this, but the bad news is that the earnings recovery does take a while," says BofA spokesman Bob Stickler. "We are prudently adjusting our underwriting standards to adapt to changing economic conditions."
Even American Express; which favors better credit customers, upped its provisions for credit card losses from $810 million to $1.5 billion, indicating upscale consumers are also having troubles. "We have enhanced our credit models and continue to prudently manage our risk by scaling back some card acquisition efforts and reducing credit lines where appropriate," says an AmEx spokeswoman.
The industry's practices during the lending boom are manifesting problems now for credit card lenders. A former call center staffer at MBNA, the big issuer bought by Bank of America in 2005, stated her job was to develop a rapport with credit card customers and advise them to spend more of their available credit limit.
As credit card companies expected, now regulators and politicians are trying to curb some of the industry's abusive practices by limiting interest rate hikes, abolishing certain fees, and cracking down on questionable billing practices. Under rules proposed by the Federal Reserve, a borrower would have a 21-day grace period before being hit with a late fee, instead of the few days offered by some firms now. A similar plan working its way through Congress would allow banks to increase rates only on consumers' future purchases—not existing balances. And under both proposals, credit card companies would have to allocate account holders' payments equally to balances with different interest rates. Currently, firms first apply payments to the debt with the lowest rate, which means it takes longer and makes it costlier for consumers to pay off their debt. The Senate isn't expected to vote on the matter until early next year. The Fed's rules, currently being reviewed by the industry, could take effect around that same time. But lenders seem to be preparing for the worst-case scenario: an outright ban on some practices.
To get ahead of rules that would hamper their ability to reprice accounts, for example, many firms are jacking up interest rates. A survey of major issuers by consumer advocacy group Consumer Action found that 37% of firms have raised rates across the board, even for borrowers with relatively pristine credit records. "In anticipation of a federal crackdown, card companies are scouring their portfolios and tightening credit," says Tower Group's Moroney.
Even a consumer who misses just one payment can suffer an interest rate hike by their card company, but again that may end up causing worse default problems for card companies as people fall further behind on their accumulating debt.
View national; by county, mortgage and credit card debt delinquency rates.