Thursday, October 16, 2008

First Mortgage Defaults: Second Credit Card Defaults?

Despite some news that credit markets may be loosening, there is more evidence today that consumer credit is changing. Moreover, credit card defaults may be on the rise. In a report issued today, the research firm Innovest Strategic Value Advisors predicts that fallout from the credit crunch will lead to a sharp increase in credit card defaults in the coming year. Specifically, they predict $1 out of every $10 owed on credit cards will be impossible to collect with banks needing to write off nearly $100 billion in credit card debt. Innovest explains that the trend is that people are saving less and that wage growth is not keeping up with debt growth (see below charts from Innovest).


Card companies have already responded to the financial crisis by cutting consumer credit lines. In an effort to assess consumer risk, American Express is and making on-going credit decisions based upon things where a consumer has their mortgage and what stores they shop at. With credit tightening, it would not be surprising for other companies to follow suit.

Sadly, the report does not contain good news in an already tough economy. With credit markets being tight, consumers that still have available credit lines may choose to use them. I see this as one more problem that the banks and consumers will have to confront in the future. Just like the home mortgages, banks knowingly issue credit card debt, which consumers use. Even with the Truth in Lending disclosures, I have concerns about the extent to which consumers understand all the workings of credit card special fees and mysterious increases in interest rates. As Steven Semeraro here blogged recently, the Credit Card Bill of Rights Act of 2008 is not likely to get further than passage in the House. While we're bailing out the banks now, there's been little discussion how the credit crisis and economic downturn will affect consumers and banks in terms of credit card default. We may be past some of the worst in terms of the panic in the financial markets and risk of widespread bank failures. Will the banks may next be asking the taxpayer to pay for heavy credit card write-offs that result from all of this mess? Let's hope not. I don't think my kids have another $100 billion to spare.

— JSM

2 comments:

neal said...

Moreover, credit card defaults may be on the rise. In a report issued today, the research firm Innovest Strategic Value Advisors predicts that fallout from the credit .Card companies have already responded to the financial crisis by cutting consumer credit lines. In an effort to assess consumer risk, American Express is and making on-going credit decisions based upon things where a consumer has their mortgage and what stores they shop at, With credit tightening, it would not be surprising for other companies to follow suit.
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Kevin said...

I think the credit defaults will continue to rise as the rest of the economy tanks.