Ballooning credit card debt and the inability of debt-laden consumers to make their payments have led to widespread defaults, a possible indicator that credit cards may become the next financial crisis, reports Time magazine (“With Defaults Rising, Is a Credit-Card Crisis Looming?” Nov. 14, 2008).

In the last 10 years consumer debt has skyrocketed, with credit card balances rising 75 percent since 1999, while family wages have only gone up 4 percent during that same time.

This year in particular, defaults on credit cards are up substantially. As of September, Americans had accumulated $971.4 billion in revolving consumer debt, a 3.4-percent increase over 2007.

These numbers aside, adds Adam Levitin, a law professor at Georgetown University, credit card debt can be considered the barometer for financial problems because families tend to rely on their credit cards when unexpected expenses such as medical or funeral bills arise. Add to that mix a loss of income due to unemployment, and it’s not hard to see why people are struggling to pay their credit card bills and why “Credit cards are in line to fall,” Levitin says.

Record Charge-Offs Suggest Trouble Ahead

In the past, credit card companies have been able to weather economic downturns since they could boost their earnings by increasing customers’ interest rates and fees. Today, however, consumers who are already financially overextended and who have fallen behind on payments are tapped out and are defaulting on their debt in record numbers.

The net charge-off rate — the value of uncollected credit card balances a bank writes off as a loss — could hit 10 percent by 2009, double the yearly default average over the last decade, predicts Innovest Strategic Advisors, an investment research firm. Total charge-offs may reach $18.6 billion during the first quarter of 2009, and just under $100 billion by the end of next year.

“With charge-offs rising so fast and beyond what was expected, the losses those cause will far surpass what companies were hoping to make up with by extra card fees and higher interest rates,” said Laura Nishikawa, an Innovest analyst.

Not only would a credit card collapse wreak havoc on the nation’s credit card companies, explains Joseph Perella, CEO of private financial services firm Perella Weinberg Partners, it would put even greater strain on an already floundering financial sector in which weakened financial companies are at the root of the problem (“Looming Credit Card Debt May be Next Crisis,” Reuters, Nov. 13, 2008).

“Unlike collapses of the past, where the finance industry just brushed it off, kept going, they’re right there at the vortex of the storm,” Perella said. “The industry is the problem, it’s not a subset of it. It’s not a containerized explosion.”

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