Analysts are cautiously optimistic over predictions that credit card issuers have seen the “peak” in delinquencies and charge-offs.
While there has been a slight drop in delinquencies on loans that are as much as 6 months’ overdue, there is a rise in loans overdue by only one or two months. Since charge-offs occur after a loan has been in default for 6 months or more, analysts are seeing the new wave of 30-60 day late payments as a sign of new charge-offs to come.
They are guessing that the lull in charge-offs was a seasonal reaction to consumers receiving income tax refunds and using them to keep balances current. Now that the tax refund money has been used and unemployment is still rising, more delinquencies and defaults could be in the offing.
Apparently this is a phenomenon to be expected, even in years when the economy is not failing. Banks generally see a few month’s of declines in delinquencies during tax-return season, and then an increase in delinquencies in June.
In other words, consumers are trying to meet their obligations – even when it means using the coveted tax refund to pay a creditor they may not be able to pay the next month.
The state of the economy is making it impossible for many consumers to keep up – especially those consumers who are among the 9.5% of the job seeking population who have lost employment. Unemployment benefits simply don’t stretch to cover all the expenses that a regular paycheck covered.
Charge-offs at U.S. banks offering credit cards have almost tripled in the past 30 months – partially as a reaction to the high unemployment rate. Unfortunately, more job losses are expected in the coming months.
Charge-offs are expected to reach 10% – 14% this summer, putting a definite dent in profits made by major credit card issuers.
Since everything in the economy affects everything else, one must wonder if the credit card issuer’s aggressive tactics to ensure their own profits has played a significant role in their subsequent losses. By dramatically increasing card holder’s interest rates, slashing their credit lines, and acting in a manner that many consumers describe as “bad faith,” card issuers may be directly responsible for those card holders’ inability and lack of desire to keep their accounts current.
When a monthly minimum payment suddenly jumps by $100 or more, and the card holder has already been struggling to meet the lower payment, it stands to reason that he or she might choose that time to simply “give up.”
Ironically, many of the major banks are the direct cause of rising unemployment numbers. Along with other changes, their discontinuation of sub-prime lending led directly to thousands of their employees joining the ranks of the jobless.
Author: Mike Clover
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