A new report, issued by the research firm Innovest Strategic Value Advisors, predicts that as the fallout from the credit crunch continues, consumers will be increasingly likely to default on their credit cards, forcing banks to write off nearly $100 billion in credit card debt over the next year (“Credit Cards at the Tipping Point?,” MSNBC, Oct. 14, 2008).

Outstanding credit card debt has grown by more than 75 percent since 1999, Innovest notes, with consumers running up higher balances on their credit cards and paying off smaller amounts of their credit card debt each month.

The average credit card balance at Citibank is up 20 percent compared to last year, while only one in five Citibank customers is paying monthly credit card bills in full. At Bank of America, fewer than one in 10 customers pay off their total bills each month.

The report’s authors, Gregory Larkin and Laura Nishikawa, believe these trends have set the stage for mounting borrower distress and that card issuers will see a rash of credit card defaults in the coming year, leading to sweeping charge-offs — the total value of uncollected credit card balances that a bank writes off, counting it as a loss.

As the economy worsens and credit card companies hit customers with higher fees and interest rates in an attempt to recoup losses from already-defaulted accounts, even more customers will default on their credit cards, Larkin and Nishikawa explain, with issuing banks standing to lose $1 on every $10 they’re owed.

“A long build-up in consumer indebtedness, deteriorating economic conditions, and a potential ‘sudden stop’ in credit availability could cause charge-offs to rise dramatically into 2009,” Larkin and Nishikawa write.

Capital One Could Experience Highest Charge-Off Rates

Capital One, considered “worst-in-class” by Innovest standards, may be the most at risk of having customers default on their credit cards because of its aggressive marketing strategies and “fee-trapping” practices such as issuing low limits on the majority of its cards, which are more likely to cause customers to incur over-the-limit fees.

The bank’s customers are already showing signs that they’re straining to keep up with their credit card debt — charge-offs at Capital One are at 6.3 percent and climbing, Innovest reports.

Capital One CEO Richard Fairbank contends that his company is prepared for any hard times ahead, arguing that the credit card business is resilient and not subject to the same issues of collateral value that have devastated the mortgage industry.

“In our U.S. card business, we’re taking many actions to navigate the current downturn,” he said.

Like other card issuers, Capital One is likely becoming choosier with its credit card applicants at the same time that it re-evaluates its current customers, lowering credit limits and curtailing discounts on balance transfers in order to mitigate its risk from consumers who won’t be able to make their credit card payments.

Popularity: 8% [?]

No related posts.