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Are credit cards the next collapse?

 
 
Reply Wed 29 Oct, 2008 09:03 am
McClatchy Washington Bureau
Posted on Tue, Oct. 28, 2008
Are credit cards the next collapse?
by Christina Rexrode | Charlotte Observer

First came trouble with mortgages, then home equity loans and commercial real estate. Now, banks are starting to worry about credit cards.

As the economy slows and unemployment rises, consumers are defaulting on credit-card payments more often. And though that trend is unlikely to create a crisis in line with the mortgage fallout, it's still a headache for banks that are already hurting.

U.S. banks charged off 5.47 percent of all credit card loans in the second quarter, according to the Federal Reserve, representing some $50 billion that they'll likely never collect. That's up from 3.85 percent the year before, and that is a movement that's on the radar of Ken Lewis, chief executive of Charlotte's Bank of America Corp.

Asked in a recent TV interview if credit-card debt would be “the next shoe to drop” for the banking industry, Lewis replied: "It, in some ways, already is," adding that such losses have risen "pretty substantially."

Laura Nishikawa, an analyst at the Innovest ratings agency, predicts that banks such as Bank of America and New York's Citigroup Inc. could be hit especially hard by credit-card defaults. That's because those banks, which offer both consumer and investment services, have been depending more heavily on money made on consumer services such as credit cards as the returns in investment banking grow increasingly unpredictable.

To be sure, credit cards don't represent a huge portion of assets for most banks. For example, they comprise about 14 percent of all consumer loans and leases at Bank of America, the country's largest credit-card issuer. The main problem, Nishikawa said, is that "everyone is so weak after what happened with mortgages that another blow to a consumer product would be hard to handle."

Consumer groups have long complained that credit-card issuers push cards onto people who don't need them or can't afford them. They say that rising credit-card defaults " just like mortgage defaults " are largely the fault of banks who lent to risky borrowers.

Innovest estimates that about 30 percent of Bank of America's credit card loans are to subprime borrowers " second only to the failed Washington Mutual Inc., which had almost half of its credit-card loans held by subprime borrowers.

Innovest also estimates that more than half of Bank of America's credit cards are high-limit cards " second only to American Express Co. (Innovest classifies high-limit cards as those with lines of more than $10,000.) Nishikawa says that combination could prove toxic for Bank of America, which may have "lent more than (borrowers) can be expected to pay back."

Bank of America's charge-offs, or loans it doesn't expect to collect on, increased to 6.14 percent of all credit-card loans, or $1.24 billion, in the third quarter. That's up from 4.61 percent the year before.

Executives of Wells Fargo & Co., which is buying Charlotte's Wachovia Corp., also noted credit-card troubles in their recent earnings call. The San Francisco bank, which is the country's eighth-largest credit-card issuer according to The Nilson Report, saw credit-card charge-offs increase to 7.2 percent, or $361 million, from 4.3 percent a year ago. Chief financial officer Howard Atkins blamed "higher bankruptcy rates, seasoning of the portfolio, and continuing economic pressure on consumers," though he said the losses were in line with the bank's expectations.

Innovest predicts that credit-card charge-offs across the industry will continue to rise, peaking around 10 percent by the first quarter of 2009. Some banks are also reporting that consumers are spending less with their credit cards, which hurts the banks because they collect fees from merchants every time a consumer uses a card.

Even so, credit card defaults probably won't wreak as much havoc as mortgage defaults already have, because they're on a much smaller scale.

"This won't be anything like the mortgage crisis," said James Early, an analyst at The Motley Fool. "Simply put, the average person owes a lot more on her house than on her credit cards."

U.S. consumers have less than $1 trillion in outstanding credit-card loans, but more than $10 trillion in outstanding mortgage loans. And the delinquency rate for mortgages is higher than that for credit-cards: 6.41 percent in the second quarter, up from 5.12 percent the year before, according to the Mortgage Bankers Association.

Indeed, no one is predicting that banks will abandon credit cards &mash; only that they'll get stingier with lending and perhaps lose money for a few quarters. Banks usually expect higher default rates on credit cards anyway, since those loans are not secured by a house, car or other type of collateral. That's one reason why banks charge such high interest rates on credit-card loans.

Guy Cecala, publisher of Inside Mortgage Finance, says that the most notable characteristic of the current cycle isn't the rising percentage of credit-card defaults, but the fact that people started defaulting on mortgages before credit cards. This time is different " the mortgage defaults are driven less by the slowing economy, Cecala said, and more by unwise lending and the declines in home prices. "The people going into default actually have jobs," he said.

As banks get squeezed on credit cards, they're sure to pass the pain along. That means they're lowering " sometimes even closing " customers' credit lines, increasing interest rates and declining more applications, which will especially hurt poor or unemployed consumers who use credit cards for basic living expenses. Early, the analyst, said it's hard to feel sorry for credit-card issuers even if they do encounter serious losses: "I don't think these guys will get much sympathy," he said.
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Type: Discussion • Score: 8 • Views: 2,305 • Replies: 33
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Bi-Polar Bear
 
  1  
Reply Wed 29 Oct, 2008 01:46 pm
I don't give a ****. I pay cash. The thought of the credit card companies having to eat all that interest and charges makes my day.
0 Replies
 
hamburger
 
  1  
Reply Wed 29 Oct, 2008 03:04 pm
@BumbleBeeBoogie,
speaking from the northern side of the border ...

we are "bombarded" by subsidiaries of american banks to : "please" take our credit card .
the latest : whenever i turn off the computer , CAPITAL ONE throws up an ad :
"CANADIANS - apply for your credit card NOW - acceptance guaranteed ! "
0 Replies
 
Eva
 
  1  
Reply Wed 29 Oct, 2008 03:05 pm
I'm another who'd like to see it happen. The banks have been entirely too anxious to overextend credit. Not only have Hubby and I been sent unsolicited credit cards, but our son (age 14 now) also receives many offers. And, since we pay our credit card bills in full every month, our credit limits keep being increased...again, unsolicited. We now have enough credit on cards to buy another house! (Which, by the way, we cannot afford!)
0 Replies
 
Brandon9000
 
  1  
Reply Wed 29 Oct, 2008 03:10 pm
@BumbleBeeBoogie,
Since the usury laws were repealed in the 70s, Congress has allowed credit card companies to prey on the people with the worst sorts of predatory, unfair practices, such as spontaneously raising rates. I hope they do go out of business.
Green Witch
 
  1  
Reply Wed 29 Oct, 2008 03:37 pm
Our bulldog received a credit card. We don't know how she applied for it, but we decided not to let her use it. She's not very responsible about such things.
0 Replies
 
FreeDuck
 
  1  
Reply Wed 29 Oct, 2008 03:37 pm
@Brandon9000,
Brandon9000 wrote:

Since the usury laws were repealed in the 70s, Congress has allowed credit card companies to prey on the people with the worst sorts of predatory, unfair practices, such as spontaneously raising rates. I hope they do go out of business.

Amen.
0 Replies
 
BumbleBeeBoogie
 
  1  
Reply Thu 30 Oct, 2008 10:08 am
My credit card company makes no money off of me because I pay my bill in full each month and my credit score is 807. I even arranged automatic payment of my utilities and other services, etc. on my credit card . Since I pay the card bill each month, I even save postage by not having to send checks. I wonder if they will ever realize it and cancel my card unless I fork over interest to them?

BBB
CoastalRat
 
  1  
Reply Thu 30 Oct, 2008 10:26 am
@BumbleBeeBoogie,
They still make money off of you BBB. They charge the people you pay a percentage of the payment to process the transaction. So no need to worry, the credit card companies will make money as long as you keep paying by credit card regardless of whether you pay it in full each month or not.
squinney
 
  1  
Reply Thu 30 Oct, 2008 10:41 am
@CoastalRat,
I had wondered about that since I pay my one card in full each month also. I use it for a few little things... a tank of gas, a minor grocery stop... just enough to keep it active.

When they started raising rates over things like being late by a few days on a utility bill that has NOTHING to do with them and saying that was enough to question your credit worthiness and increase ones rate, I stopped caring if they went under or not.
0 Replies
 
parados
 
  1  
Reply Thu 30 Oct, 2008 10:42 am
@Brandon9000,
It wasn't the congress passing legislation that did this. It was USSC ruling.

http://www.bankruptcylawmaryland.com/blog/whatever-happened-to-usury-laws/

At that point, South Dakota had no cap on rates and banks went there to run their credit card businesses so they could charge high rates in other states.

http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/rise.html
maporsche
 
  1  
Reply Thu 30 Oct, 2008 11:07 am
If credit card companies fail or go under, you'll see a lot of our economy go with it. How much of our buy, buy, buy economy is financed through credit cards? Answer: A LOT.
squinney
 
  1  
Reply Thu 30 Oct, 2008 11:12 am
@maporsche,
Which is why I would welcome it. We have to get back to living within our means.
0 Replies
 
cjhsa
 
  1  
Reply Thu 30 Oct, 2008 11:16 am
@CoastalRat,
CoastalRat wrote:

They still make money off of you BBB. They charge the people you pay a percentage of the payment to process the transaction. So no need to worry, the credit card companies will make money as long as you keep paying by credit card regardless of whether you pay it in full each month or not.


Precisely, which is why paying for anything with cash is silly. Always use a credit card that pays you back either as a % of purchases or in other perks whenever you can.
chai2
 
  1  
Reply Thu 30 Oct, 2008 12:20 pm
@parados,
I watched an interesting documentary about this parados.

They picked south dakota because ranchers/farmers were able to take out really short term loans, like a month or so, until they harvested or took cattle to market.

They were willing to pay a higher rate for such a short time, in order to have the money to get their crops in.

funny how such a simple, down to earth thing blowed up into this mess.
0 Replies
 
CoastalRat
 
  1  
Reply Thu 30 Oct, 2008 01:29 pm
Of course, the real kicker is that because more and more people are using debit/credit cards for purchases, sellers who accept them are forced to charge everyone more than they would if these cards did not exist in order to maintain their profit margins after paying the card companies their % of the sale for processing.

In fact, at one time you could find gas stations that had one price for credit card customers and a lower price for cash customers because of the fees they had to pay.

Brandon9000
 
  1  
Reply Sat 1 Nov, 2008 10:16 pm
@parados,
parados wrote:

It wasn't the congress passing legislation that did this. It was USSC ruling.

http://www.bankruptcylawmaryland.com/blog/whatever-happened-to-usury-laws/

At that point, South Dakota had no cap on rates and banks went there to run their credit card businesses so they could charge high rates in other states.

http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/rise.html

I stand corrected. Highly informative. Thanks.
0 Replies
 
Brandon9000
 
  1  
Reply Sat 1 Nov, 2008 10:20 pm
@BumbleBeeBoogie,
This is about the companies resisting legislation to reign them in:

http://abcnews.go.com/Business/Story?id=4448963&page=1
0 Replies
 
maporsche
 
  1  
Reply Sun 2 Nov, 2008 01:17 pm
@CoastalRat,
The other side of this though is that people who use credit cards spend more in these establishments than people who use cash do.

If there were no credit cards, the businesses would have to charge more to make up for the lost volume.
0 Replies
 
OGIONIK
 
  1  
Reply Sun 2 Nov, 2008 08:07 pm
@BumbleBeeBoogie,
credit doesnt work, money in itself is fraud.

as long as we depend on some paper **** someone prints up on a whim, our society is doomed to repeat the same mistakes over and over and over.

if u cant feed yourself, then die.

ahh, the beauty of natural selection.
 

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