Credit Card Industry Continues Decline

Last year was a rough year in the credit card industry, with around forty-five billion dollars of bad debt having to be written off. And the situation could continue to worsen, as more and more jobs are lost in this devastating economic era. Although just how many Americans will be unable to pay their credit card debts is hard to predict, as the old standards seem to be falling by the wayside.

Banks have often looked at unemployment rates for an unofficial estimate as to what type of losses or bad debts they could expect over the coming months. As jobs are lost of course more people have trouble paying off their accounts. In this economy though, losses are starting to come at an even higher rate than job losses. In fact, results of bank stress test recently released suggest that 19 of the nation’s largest banks could be dealing with over $80 billion in credit card losses by the end of 2010.

Some economists are predicting the unemployment rate is going to go over 10%, and if that happens the rate of uncollectible balances at some banks could surge. The government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to some estimates losses at the nation’s largest banks could go over $140 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business.

In the official stress test results regulators published losses only on credit cards held on bank balance sheets. The $80 billion figure did not reflect the tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and kept off their balance sheets. Some of those losses will be absorbed by investors, but it still leaves further debt on the bank’s balance sheets.

Further worries will arise if, as predicted by some economists, the number of job losses climbs even higher. Recently the unemployment rate reached 8.9 percent as the economy shed almost 540,000 jobs. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, have been aligned because consumers who lose their jobs are more likely to miss payments.

The rate of credit-card losses could surpass the jobless rate because of the compounding effects of the housing crisis and dismal consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent. But unlike in previous recessions, cardholders who lose their jobs will have less ability to extract equity from their homes or draw down retirement accounts to help pay off their debts. That means borrowers who fall behind on payments are more likely to default, leading to greater overall losses.

In 2008 banks wrote off an average of 5.5 percent of their credit card balances, while the average unemployment rate sat around 5.8 percent. By the end of 2008 though, the rate of credit-card write-offs was up to 6.3 percent.

Capital One Financial, American Express and Bank of America showed 2009 first-quarter loss rates that hovered around 8.5 percent, roughly on par with the unemployment rate. All three banks are expecting higher losses in the coming months. Even Chase Card Services, which charged off just 7.7 percent of its card loans in the first quarter of this year, is expecting its loss levels to eclipse the unemployment rate by year-end.

For banks, the economics of the credit card business are progressively troubling. As the recession extends on, cardholders are drastically cutting their spending. New customers with strong credit histories are increasingly hard to find and many of the borrowers who are experiencing trouble paying are deeply in debt. Banks are slashing credit lines and are even increasingly open to removing late fees or reducing balances, all in an attempt to prevent full default of the amount owing.

In addition to spiralling job losses and high rates of default, lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profitability in the credit card industry. The Senate is expected to take up the Credit Cardholders Bill of Rights after it passed in the House.