Credit Card Defaults at 20 Year High

The level of defaults are reaching a dangerous level. The big question right now--has the market already discounted this information? If not, a new leg down is coming after this consolidation.

U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express Co (AXP) and Citigroup (C) amid a deepening recession.

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.

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U.S. credit card defaults rise to 20 year-high

By Juan Lagorio

NEW YORK (Reuters) - U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express Co (AXP) amid a deepening recession.

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) -- 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.

U.S. unemployment -- currently at 8.1 percent -- is seen approach 10 percent as the country endures its worst recession since World War Two, leaving more than 13 million Americans jobless, according to a Reuters poll of economists.

However, not all were bad surprises. JPMorgan Chase & Co (JPM) and Capital One reported higher credit card losses, but they were below analysts expectations.

Chase -- a big issuer of Visa cards -- reported its charge-off rate rose to 6.35 percent in February from 5.94 percent in January. The loss rate for the first two months of the quarter is 126 bps from the previous quarterly average compared to an estimate of a 145 bp increase, Orenbuch said.

Capital One Financial Corp's (COF)default rate increased to 8.06 percent in February from 7.82 percent in January.

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Analysts estimate credit card chargeoffs could climb to between 9 and 10 percent this year from 6 to 7 percent at the end of 2008. In that scenario, such losses could total $70 billion to $75 billion in 2009.

"People underestimated the severity of the downturn we are experiencing and I wouldn't be surprised to see them north of 10 percent," said Todd, who added American Express was most exposed to higher credit card losses, given its sole reliance on the industry.

Credit card lenders are trying to protect themselves by tightening credit limits, rising standards, and closing accounts. They have also been slashing rewards, raising interest rates and increasing fees to cushion further losses.

Meredith Whitney, one of Wall Street's best known and most bearish bank analysts, estimates that Americans' credit card lines will be cut by $2.7 trillion, or 50 percent, by the end of 2010 -- and fewer Americans will be offered new cards.

"We believe that the US credit card industry will feel additional credit pain over the next 12-18 months. Until lenders like Capital One show stabilization, followed by trend-bucking improvement over a several-month period, we will continue to remain bearish on credit card lenders," said John Williams, an analyst at Macquarie Research.

Todd said credit card issuers shares -- which are down up to 60 percent in 2009 -- will remain under pressure until the end of 2009, or early next year, when bad loans could start to redeem.

(Reporting by Juan Lagorio, editing by Bernard Orr)

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Credit Crunch Are Credit Cards the Next Shoe to Drop-

Without doubt, credit was extended too freely over the past 15 years, and a rationalization of lending is unavoidable. What is avoidable, however, is taking credit away from people who have the ability to pay their bills. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively.

I am reading stories about consumers complaining that their credit card limits are being reduced. In addition, I wrote recently about consumer complaints about sharp increases in the annual percentage rates they are paying on their credit card. It seems that credit lines are getting cut, and APRs are going up, regardless of the quality of the consumers' credit. It appears credit card companies are using zip codes to determine your credit worthiness. In other words, if the zip code you live in is experience high housing default rates or price deterioration--you are going to pay higher rates regardless of your credit history.

Today, Meredith Whitney is writing about the behavior of credit card companies. She says,

...available (credit) lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone, and she estimates over $2 trillion of credit-card lines will be cut within 2009, and $2.7 trillion by the end of 2010.

When you couple this with the rising savings rate, you could easily conclude that the economy is going to grow slowly for the foreseeable future.

You should read the article below carefully and to the end.

There are going to be investment opportunities based on this trend. For example, is it a good idea to be short the major credit card companies? Are travel companies going to get "killed"? While it is not well known, a large fraction of senior citizens use credit cards to purchase their medication, is this trend going to effect the health of older people and retiring baby boomers? Or, the earnings of pharmaceutical companies?

Are you listening? Your thoughts?

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Credit Cards Are the Next Credit Crunch

Washington shouldn't exacerbate the looming problem in consumer credit lines.
By MEREDITH WHITNEY

Few doubt the importance of consumer spending to the U.S. economy and its multiplier effect on the global economy, but what is underappreciated is the role of credit-card availability in that spending. Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon. While those numbers look small relative to total mortgage debt of over $10.5 trillion, credit-card debt is revolving and accordingly being paid off and drawn down over and over, creating a critical role in commerce in America.

Just six months ago, I estimated that at least $2 trillion of available credit-card lines would be expunged from the system by the end of 2010. However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010.

Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy. Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57% contraction in credit-card lines.

There are several factors that are playing into this swift contraction in credit well beyond the scope of the current credit market disruption. First, the very foundation of credit-card lending over the past 15 years has been misguided. In order to facilitate national expansion and vast pools of consumer loans, lenders became overly reliant on FICO scores that have borne out to be simply unreliable. Further, the bulk of credit lines were extended during a time when unemployment averaged well below 6%. Overly optimistic underwriting standards made more borrowers appear creditworthy. As we return to more realistic underwriting standards, certain borrowers will no longer appear worth the risk, and therefore lines will continue to be pulled from those borrowers.

Second, home price depreciation has been a more reliable determinant of consumer behavior than FICO scores. Hence, lenders have reduced credit lines based upon "zip codes," or where home price depreciation has been most acute. Such a strategy carries the obvious hazard of putting good customers in more vulnerable liquidity positions simply because they live in a higher risk zip code. With this, frequency of default is increased. In other words, as lines are pulled and borrowing capacity is reduced, paying borrowers are pushed into vulnerable financial positions along with nonpaying borrowers, and therefore a greater number of defaults in fact occur.

Third, credit-card lenders are currently playing a game of "hot potato," in which no one wants to be the last one holding an open credit-card line to an individual or business. While a mortgage loan is largely a "monogamous" relationship between borrower and lender, an individual has multiple relationships with credit-card providers. Thus, as lines are cut, risk exposure increases to the remaining lender with the biggest line outstanding.

Here, such a negative spiral strategy necessitates immediate action. Currently five lenders dominate two thirds of the market. These lenders need to work together to protect one another and preserve credit lines to able paying borrowers by setting consortium guidelines on credit. We, as Americans, are all in the same soup here, and desperate times are requiring of radical and cooperative measures.

And fourth, along with many important and necessary mandates regarding fairness to consumers, impending changes to Unfair and Deceptive Acts or Practices (UDAP) regulations risk the very real unintended consequence of cutting off vast amounts of credit to consumers. Specifically, the new UDAP provisions would restrict repricing of risk, which could in turn restrict the availability of credit. If a lender cannot reprice for changing risk on an unsecured loan, the lender simply will not make the loan. This proposal is set to be effective by mid-2010, but talk now is of accelerating its adoption date. Politicians and regulators need to seriously consider what unintended consequences could occur from the implementation of this proposal in current form. Short of the U.S. government becoming a direct credit-card lender, invariably credit will come out of the system.

Over the past 20 years, Americans have also grown to use their credit card as a cash-flow management tool. For example, 90% of credit-card users revolve a balance (i.e., don't pay it off in full) at least once a year, and over 45% of credit-card users revolve every month. Undeniably, consumers look at their unused credit balances as a "what if" reserve. "What if" my kid needs braces? "What if" my dog gets sick? "What if" I lose one of my jobs? This unused credit portion has grown to be relied on as a source of liquidity and a liquidity management tool for many U.S. consumers. In fact, a relatively small portion of U.S. consumers have actually maxed out their credit cards, and most currently have ample room to spare on their unused credit lines. For example, the industry credit line utilization rate (or percentage of total credit lines outstanding drawn upon) was just 17% at the end of 2008. However, this is in the process of changing dramatically.

Without doubt, credit was extended too freely over the past 15 years, and a rationalization of lending is unavoidable. What is avoidable, however, is taking credit away from people who have the ability to pay their bills. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively.

Ms. Whitney is CEO of Meredith Whitney Advisory Group, LLC.

Bob DeMarco is a citizen journalist, blogger, and Caregiver. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites (15). Bob is actively seeking syndication and writing assignments.

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Should Rick Santelli Care that Credit Card Companies are Raising Rates?

Where is Rick Santelli when you really need him? Ready to call people current on their mortgage--losers, Rick Santelli is no where to be found as credit card companies raise interest rates on customers--good or bad. Here is an issue you could sink your teeth into Rick, and I am going to help you understand it. No ignorance is bliss on this one.

Lets start with the reason credit card companies are raising rates. They will tell you, Rick, more customers are defaulting on their credit cards so they have to raise rates on good customers to make up the difference. So the losers--those unable to pay their credit card bills-- are causing the winners--those that are paying their credit card bills--to pay more (higher interest rates).

Credit card rates can go as high as 25-30 percent depending on state. This might get your Republican (or is it Liberatarian?) blood boiling Rick. Hillary Clinton while running for President told Ohioans,

“I’ve advocated that we rein in the credit card interest rates, cap them at 30 percent and get them below,” she said.

Ohioans owe around $30 billion on their credit cards. Gee, thanks Hillary.

Regardless of credit rating, credit card companies can charge you any rate they see fit as long as they keep it below 30 percent or the highest allowable rate in a given state. Politicians clearly in the pocket of the credit card companies are allowing these high rates of interest. Some might think of 25 percent as usury. Not as bad as loan sharking--but close.

Any of those guys that live in Barrington, Illinois that were cheering for you the other day getting screwed Rick? Would you call someone who has been paying their credit card bill month after month, year after year, a loser Rick? And, if they have been paying faithfully is it fair to raise their interest rate because "losers" aren't paying?

Rick, Help for Homeowners got you in a tizzy the other day--the rant. All of housing accounts for about 16 percent of GDP. The biggest category in GDP is retail sales. Retail sales account for about 66-70 percent of GDP. So when a credit card company raises interest rates they take money away from retail sales the lifeblood of GDP. I think it is safe to assume that most people paying interest on a credit cards are living pay check to pay check. So, their disposal income goes down if they have to send more bucks to the credit card company. As an aside, credit card companies are also raising minimum payments. Isn't this anti-American Rick?

Rick, someone needs to wake up the Obama administration about this. You seem to have their attention, and I bet if you attack on this issue not only will your blackberry freeze it will likely explode--this is the stuff that makes hero's. Somebody has to do it Rick--and you are the best man for the job.

By the way Rick, the banks that received TARP money are raising credit cards interest rates on existing credit card customers. This means they are taking your hard earned bucks and robbing the winners. I think its time for you to get your constituency riled up.

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Source of these quotes: Credit Card Companies Raising Rates on Consumers

• “I received notice that the interest on my Chase card will go up from 4.24% APR to 9.24%,” Chase customer John Biek said in an email to FOX Business.


• Gary Barrett told FOX Business that his Capital One card rate was going to increase from 14.3% to 17.9%. “This is a card that normally I carry a balance of less than $800, and frequently it has no balance due, and I have never been late on a payment,” Barrett wrote in an email.


• And Patricia of York, Pa., said in an email that her Capital One Visa will see a hike as well: “My current rate of interest is 5.37%. The notice states that [the] rate increase will go to 13.9% on purchases [and] 24.9% on cash advance.”


• “Bank of America is doing the most dramatic changes I’ve seen,” said Emily Peters, a personal-finance expert for Credit.com. She said she has heard of cases where BofA card rates have been going up 10 to 20 percentage points.

Feel free to email this to Rick Santelli.

Rick's CNBC Bio

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