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TechnoratiAre Credit Cards The Next Collapse?
First came trouble with mortgages, then home equity loans and commercial real estate. Now, banks are starting to worry about credit cards.
![[American Express and MasterCard credit cards are shown in Washington June 25, 2008. Consumer groups have long complained that credit-card issuers push cards onto people who don't need them or can't afford them. They say that rising credit-card defaults - just like mortgage defaults - are largely the fault of banks who lent to risky borrowers.
(Jim Bourg/Reuters)]](http://www.commondreams.org/files/article_images/creditcards1029.jpg "creditcards1029.jpg")
As the economy slows and unemployment rises, consumers are defaulting on credit-card payments more often. And though that trend is unlikely to create a crisis in line with the mortgage fallout, it's still a headache for banks that are already hurting.
U.S. banks charged off 5.47 percent of all credit card loans in the second quarter, according to the Federal Reserve, representing some $50 billion that they'll likely never collect. That's up from 3.85 percent the year before, and that is a movement that's on the radar of Ken Lewis, chief executive of Charlotte's Bank of America Corp.
Asked in a recent TV interview if credit-card debt would be "the next shoe to drop" for the banking industry, Lewis replied: "It, in some ways, already is," adding that such losses have risen "pretty substantially."
Laura Nishikawa, an analyst at the Innovest ratings agency, predicts that banks such as Bank of America and New York's Citigroup Inc. could be hit especially hard by credit-card defaults. That's because those banks, which offer both consumer and investment services, have been depending more heavily on money made on consumer services such as credit cards as the returns in investment banking grow increasingly unpredictable.
To be sure, credit cards don't represent a huge portion of assets for most banks. For example, they comprise about 14 percent of all consumer loans and leases at Bank of America, the country's largest credit-card issuer. The main problem, Nishikawa said, is that "everyone is so weak after what happened with mortgages that another blow to a consumer product would be hard to handle."
Consumer groups have long complained that credit-card issuers push cards onto people who don't need them or can't afford them. They say that rising credit-card defaults - just like mortgage defaults - are largely the fault of banks who lent to risky borrowers.
Innovest estimates that about 30 percent of Bank of America's credit card loans are to subprime borrowers - second only to the failed Washington Mutual Inc., which had almost half of its credit-card loans held by subprime borrowers.
Innovest also estimates that more than half of Bank of America's credit cards are high-limit cards - second only to American Express Co. (Innovest classifies high-limit cards as those with lines of more than $10,000.) Nishikawa says that combination could prove toxic for Bank of America, which may have "lent more than (borrowers) can be expected to pay back."
Bank of America's charge-offs, or loans it doesn't expect to collect on, increased to 6.14 percent of all credit-card loans, or $1.24 billion, in the third quarter. That's up from 4.61 percent the year before.
Executives of Wells Fargo & Co., which is buying Charlotte's Wachovia Corp., also noted credit-card troubles in their recent earnings call. The San Francisco bank, which is the country's eighth-largest credit-card issuer according to The Nilson Report, saw credit-card charge-offs increase to 7.2 percent, or $361 million, from 4.3 percent a year ago. Chief financial officer Howard Atkins blamed "higher bankruptcy rates, seasoning of the portfolio, and continuing economic pressure on consumers," though he said the losses were in line with the bank's expectations.
Innovest predicts that credit-card charge-offs across the industry will continue to rise, peaking around 10 percent by the first quarter of 2009. Some banks are also reporting that consumers are spending less with their credit cards, which hurts the banks because they collect fees from merchants every time a consumer uses a card.
Even so, credit card defaults probably won't wreak as much havoc as mortgage defaults already have, because they're on a much smaller scale.
"This won't be anything like the mortgage crisis," said James Early, an analyst at The Motley Fool. "Simply put, the average person owes a lot more on her house than on her credit cards."
U.S. consumers have less than $1 trillion in outstanding credit-card loans, but more than $10 trillion in outstanding mortgage loans. And the delinquency rate for mortgages is higher than that for credit-cards: 6.41 percent in the second quarter, up from 5.12 percent the year before, according to the Mortgage Bankers Association.
Indeed, no one is predicting that banks will abandon credit cards &mash; only that they'll get stingier with lending and perhaps lose money for a few quarters. Banks usually expect higher default rates on credit cards anyway, since those loans are not secured by a house, car or other type of collateral. That's one reason why banks charge such high interest rates on credit-card loans.
Guy Cecala, publisher of Inside Mortgage Finance, says that the most notable characteristic of the current cycle isn't the rising percentage of credit-card defaults, but the fact that people started defaulting on mortgages before credit cards. This time is different - the mortgage defaults are driven less by the slowing economy, Cecala said, and more by unwise lending and the declines in home prices. "The people going into default actually have jobs," he said.
As banks get squeezed on credit cards, they're sure to pass the pain along. That means they're lowering - sometimes even closing - customers' credit lines, increasing interest rates and declining more applications, which will especially hurt poor or unemployed consumers who use credit cards for basic living expenses. Early, the analyst, said it's hard to feel sorry for credit-card issuers even if they do encounter serious losses: "I don't think these guys will get much sympathy," he said.
45 Comments so far
Show AllI agree with many of the comments posted below about the abuses of credit cards by both banks and borrowers. However, if the number of credit cards are significantly reduced by banks our economy could be headed for the depression some are talking about. Many small businesses use credit cards for their day to day operations. Most purchases through the web require a credit card. If suddenly these cards were eliminated or significantly reduced many small companies would go out of business, unemployment would increase and consumers purchasing would drop like a rock. We can handle reducing credit cards slowly but a dramatic reduction could be an economic disaster.
Our whole financial system is collapsing. The dollar is losing value by the day. The election is a joke in that both the major candidates have the same stance on all the issues of importance. War? yes! Extend the war into Pakinstan and Syria? yes. Equal health care for all of us? no. Pump our tax funds into the tops levels of the banking greedy theives? yes. Create a W.P.A. project to create jobs building a renewable energy system? no. Help the people being put out of their homes? No.
We are screwed. Look up the Amero on the internet. Our leaders are planning to replace the dollar with the Amero. Your dollars will be like the Confederate dollars. We have very hard times ahead and we are choosing between Twiddle de Dee and Twiddle de Dumber. Two guys in the pay of our corporate leaders. This is not a democracy. They don't even count the votes.
If I was tossed out of my house, had no job, no health care why would I pay the credit card bill or student loan?
People are not that stupid. If they jail you you get food, housing, health care and a job at the prison sweatshop.
The 'freedom' of homelessness may not be so attractive.
good. what's next? student loans? i have a lot and i'm thinking to rebel and default as i'm fed up with the socialization of wall street. why do i have to pay off my hefty loan money with high interest rates while living like a pauper almost, while the fatcats can sit back and get bailed out for their loans? why can't i get bailed out too? see what i mean? anybody thinking to also "bail out" on student loans? a few other people who are paying off their loans never talk about this. but it's a legitimate question.
it's just plain not fair. we, the people, need not kowtow anymore period. i've had it.
Our current economic problems are much larger than the recapitalization of banks, what is needed is a recapitalization of the middle class and poor. Absent that, any money given to the banks will be in vain. The economic apple cart is tilted so badly toward the rich that the middle class and poor lack the resources to pay their mortgages, or credit cards. As people lose their jobs the economy will spiral downward and more homes will be lost and credit cards defaulted upon. Unless the government acts immediately to shore up the middle class and the poor, then this downturn will increasingly begin to resemble a depression. Unfortunately our government is not proactive, but instead reactive and therefore largely unable to take corrective action in time to avoid the worst case scenario. Sad but true.
The credit card: the worst invention, especially for those who just don't know how to handle them. Just say NO if you don't want one!
Forewarning: Check out what the good and quick reference article linked in my following post says on Obama's national policy team of "advisers", national, or else economic anyway. People in the U.S. really want and need to know about this!
http://www.commondreams.org/headline/2008/10/29-2#comment-1067620
Credit card companies are legalized loan sharks. They got Dubya, Cheney, & Co. to pass a bankruptcy bill that screwed consumers and made the courts act their muscle / collectors. The one real problem in this scenario has happened though; there is no money to collect. That happened because some of the actions of their fellows in the financial sector was even more crooked than theirs. Perhaps these events is finally the spur that gets Americans to save at the same level as the citizens of other first world nations.
LONG OVER DUE. We Americans are now pressed/blessed with a social opening: De-Consumerism. The transparent bankruptcy of materialist gluttony, understood as such by most Americans, offers us a stage for advancing an economic-environmental paradigm. People will now hear arguments against Usery economics. It should be us who explain the nature and operation of Empire Capitalism in decline. Our propitious historic opportunity to dethrone Consumer status and Materialism. If we would accompany our critiques of Criminal Capitalism with a mass energy educational campaign aimed at convincing people that less is better. National forests would be more popular than Disney World. Organic peanut butter in more households than pizza home deliveries. Affordable Bicycles built to roll for 40 years. Clean/radically cleaner Public transport the norm of travel.
The Revolution advancing equitable wealth sharing and conservative use of materials. The Earth beneath, around and above our borders - the national treasure.
Moe Seager
Indeed, the "social opening" is there, we need more talking which is Karl Rove simple but with intellectual foresight for sake of One Earth. Not personal growth, President Bush is an example of personal growth and thats all.
Discussion around usery economics will invoke new ideas.
The people who hijacked the monietory efficency are left holding the bag - if not, they should be. Good riddence. They will be coming for more monies.
toophat for you!
The system wants everyone to be strapped with credit card debt (except the rich). They want Americans to buy groceries and medical care on credit(as well as lots of crap), When "consumers" can only make the minimum payment, which all goes to the banks -(loan sharks that they are) the system is very happy.
Hasn't anyone figured out the relationship between American consumer debt and antidepressant use? Spend, spend,spend and - "What me worry?". They like that; and plan on it. It's the only planning the economy has these days - how to screw working people, families and the poor. It's what keeps this corrupt system going and keeps people from figuring out it's a house of cards.
Plenty of people refinanced their mortgages over the past eight years and racked up lots of credit card debt - but they had nice tax free inheritances to bail them out. Damn those irresponsible people who weren't smart enough to have a trust fund!
I am a human being, a member of a community, a citizen perhaps - not a "consumer". If it's true that 70% of the US economy is based on shopping, when it collapes - it will happen quickly. Then their demands for minimum payments will be blood from a stone.
Has anybody noticed that the banking collapse started after oil prices started dropping. When goldman sachs said in july that oil would go to $150 barrel the next day it jumped $6 a barrel. The point being that they (the banks and brokerage houses ) were playing the futures markets insuring high oil prices. What they did not figure was the american people were cutting back and oil inventories were rising which forced prices down which in turn produced big losses on future trading instead of gains. These losses mounted which made the banks almost insolvent, some banks held onto some of their cash but many big banks were plain greedy and failed.
All of the big brokerage houses were making money speculating and manipulating the energy markets which is why prices dropped. When the shit started hitting the fan prices dropped even further. Now some of these banks are getting money from us and today oil prices rose. There are too many coincedinces. I think the credit crisis started with the banks and their greed. There needs to be massive oversight of the banks
Just a thought What do you think?
MKRIO
Cutting up a credit card is stupid. What people who have to do this
in order to control themselves lack is discipline.
The advantages of a credit card are obvious:
Try renting a car without one. You have to have a bucket of cash
as a deposit before they'll rent you anything.
When you buy something you have the protection of the credit issuer
should the product be defective, broken, etc.
Without a credit history you will not be able to get a mortgage should
you ever want one.
With a credit card you get absolute records of what you have spent and
don't have to worry what happened to the scrap of paper at the bottom of
your handbag or briefcase.
There is nothing wrong if you pay your card in full every single time.
Of course, the issuers do not want you to do this because they are
charging you rates that loan sharks used to charge.
AND
the entire US economy, 72% is founded on consumer buying.
Do you really want to wreck this economy any further?
The problem, as said, is that people cannot or will not control themselves. See a 52 inch flat screen for X dollars? Oh, just buy it
and worry later. DUMMMMMMMMMMMMMMMMB
If this isn't pitiful, then what is?
One of the biggest misconceptions these days puts everyone in the same shoes. And we all have different sized feet!
Just because I'm so strong,so healthy, so intellegent and know how to manage my money, keep myself out of debt, pay my bills on time, and in general take care of myself, I know everyone else isn't like me. We come in all sizes, shapes, and our minds don't operate in the same ways.
It also has a lot to do with our upbringing, and many people today were raised by constant gratification. So they continue to live the only way they know. Same thing happened with the Welfare thing.
I used to think we should kill
the lawyers – and bankers.
I’ve changed my mind.
We should revoke* their licenses to
steal and wait for them to kill
themselves.
Dick
*Repeal the 16th amendment and
vote against any attorney
running for public office.
Let's hope the credit card "industry" goes out of business. There was a time when people paid cash for things. If they didn't have the cash, they didn't buy. That's the way it should be.
I closed my last credit card account a year ago (even though I always tried to pay it off each month). Initially I had some trepidation about it because I'm so inured to using credit cards, but today I can say it's wonderful!
When paying for things with a credit card, one effectively pays twice: once at the point of purchase, and again when paying the credit card bill. Paying with cash (or check) avoids that second "payment." In addition, paying with cash precludes any possibility of subsequent errors. I have purchased things with credit cards, only to discover later that the amount was in error or I was billed twice. That can't happen with cash. Finally, paying with cash discourages spending. If I want to purchase something expensive now, I have to first go to the bank and withdraw the money. That forces me to think twice. At other times, I've found myself with insufficient cash to buy all I wanted. In the past I'd simply use my debit card and buy everything; now sometimes I have to put things back on the shelf. One more thing: using cash instead of a debit card protects one from fraud that way too.
Dave
http://daveeriqat.wordpress.com/
Don't forget the vehicle loans. As these defaults start to rise, more cars will enter the market than can be disposed of. The domino effect continues...
The real fear of many people is deflation. But that won't happen across the board. The prices for things we buy will continue to go up, but our wages will go down. This has already begun to happen.
I have to laugh at all of the people who have more CC debt than they can pay in
a lifetime. My LOL is because I don't own a credit card. I do have a debit card.
the debit card is only used for my SS check. I can withdraw funds from ATMs only
if the money is there.
Same with me, the debit card routine. But: if your card has that visa or mastercard logo, it effectively is a credit card. I have on occasion used my card as such when I needed/wanted to buy something. Instead of calling the purchase as being done on credit, it's called an overdraft. Same thing in the end, though.
My debit card does in fact have a mastercard logo, However, itt rejects overdrafts
I don't own a credit card either..just my debit card. I buy what I can afford. Only debt is grad school debt...it sucks but one day I'll pay it off. I own a paid off car and I rent. Will buy a house when prices return to normal.
But these days in this economy one is punished for being a "saver". Oh well should have lived high on the hog like the rest of the country.
The rich are squeezing every last dime out of these poor folks, and now we need a president who will trust bust and break up corporations and agribusinesses. It's time for 40 acres and mule. It's time to get rid of the parasite class. They live off the work of others and do nothing but force poor people to pay outlandish fees for loans they cannot afford. Nationalize the banks. Break them down. Nationalize oil companies and force them out of business. Move into the direction of clean energy. We need to take a hammer to these wallstreet fatcats and corporate parasites.
The member banks of the Federal Reserve are not required to have money to loan it. That's called fractional banking. It increases the money supply. Increasing the money supply causes inflation (increases in prices) because of increases in demand which resulted from the increases in money supply, etc., etc., etc.
The use of a credit card for purchasing ANYTHING when it would not otherwise be purchased has the same effect. It sort of makes it possible for any credit card user to become a mini-central bank.
Let's pretend credit card debtors are TOO LARGE TO FAIL AND BAIL THEM OUT. The proper process would be to give them enough of the newly minted "golden" dollars to pay off the credit card debt. Banks receiving the bailout dollars could use them to pay salaries.
Maybe we could get rid of FRN's altogether!
"Are Credit Cards The Next Collapse?"
I sure as hell hope so! You can't build a new building without tearing apart the old one.
What we need is a return to a "cash-and-carry" society. If you can't pay for it--you save until you can. THAT would turn this economy from lying on the ground and get it back on its feet.
It might be rough going at first but, hell, most of us working class folks are doing that NOW!
Scratch Open A Cynic And You Will Find An Angry Idealist.
To answer that question: I hope so.
What do these *#($#@ corporatists expect? First they send the jobs overseas, then they turn to illegal immigrants for cheap labor, then they sell "trick" mortgages to people....
Sorry, I've got ZERO sympathy for the credit card companies. If consumer credit is squeezed, the corporatists will be forced to lower prices on their products. And BTW, y'all do realize they are cultivating foreign customers to replace us? In their view, American consumers have become too ungrateful and demanding.
And I'm still mad as hell about their "universal default" con game.
I have ONE credit card that I can rent a car with if I need to--that's all. Living on cash is a good, good thing. (I'm a secretary, so I'm not rich--but I can afford to do it.) The peace of mind you receive in exchange for not being in debt is absolutely priceless.
God, I hate it when people bash immigrants. How could or would any of us do the jobs that these folks are asked to do. On top of that, just see how they are daily cheated out of their wages. I am hoping that there is a warm place in hell waiting for those that treat others so poorly.
It was illegal immigrants, not immigrants.
And many people that are unemployed would do these jobs, these aren't jobs "Americans won't do". They can't do them for the cheap wages paid to illegals. The American worker cost twice as much at the same wage as the illegal because the employer can avoid SS, benefits, medical treatment, retirement, etc.
I didn't think that was bashing to say that illlegals are brought in for cheap labor to replace more expensive American workers. Thats the plain truth.
And yes, even at their lowly wages they are cheated and abused. Its a disgrace. But the combination of politicians looking for grateful votes, big business and their shills like LaRaza, LULAC, MALDEF and the rest are hard to beat.
I've got ZERO sympathy for capitalism.
Capitalism did not produce this mess. Nor did it cause these bailouts. Nor is it responsible for CC debt.
Deregulated greed is responsible for this and a group of men with no morals.
Nice post. And yes, let the CC companies eat the debt they should never have made available. Hope they choke on it.
Have to agree. Marxism is not a good alternative people. That failed also. Regulated capitalism is the best route forward.
OK - here's a what if. What if my kid needs medicine and my lousy corporate run health plan won't cover it. We used to have 2 incomes, but my wife died of cancer because my lousy corporate run health plan wouldn't cover most of it. I lost my job in my home town, so recently I've had to pay as much at $5.00 a gallon for gas so that I can get back and forth to my job. So I'm not exactly exploding with cash like you are.
So back to the question.... Should I use my credit card to buy medicine for my kid, or because I don't have cash should I forego the medicine and let the kid fight off strep by himself?
Do as I imagine millions of Americans have done. Use your credit cards to keep yourself and your family healthy. What's to lose? Your family and your health. They sent out all those credit card offers to hook people into living the good life through credit. Then took everything from them, but the cards. For some time it's been the only way for a great many people to even put food on the table.
I was in that position once. Not by my doing, but because of unforseen circumstances. I had a maxed out VISA, so every month I'd make the minimum payment, and would then turn around and put that amount back on it buying the very bare necessities, because you don't get a whole helluva lot for $25. I was living on oatmeal and crackers, and not very much of either. Not a good way to live. I've been credit card free for many years.
I bet banks, and mom and pop store robberies are up.
Exploding with cash???? How come I'm not aware of my wealth?
The post was hypothetical. Once credit is gone, prices MUST fall; it is supply and demand. That includes the price of medicine. The change would not happen overnight and it wouldn't be without sacrifices. Short term band aid or long-term cure. You decide....
Scratch Open A Cynic And You Will Find An Angry Idealist.
When your kid is sick you will take short term every time.
Joe
I apologize for writing I did. Apparently the point is getting missed....Happy Wendzday!
Scratch Open A Cynic And You Will Find An Angry Idealist.
There is something wrong with the way many well-meaning journalists report on the credit crunch and everything related to it. They make it sound like the original fault was in lending money to poor people, so-called subprime mortgage or credit card takers. But the real problem is that these subprime consumers never really had an alternative. We all need a home and many of us need a car to go to work to earn a living. The problem therefore is that such things were not made available to them through government policy. Rather government allowed an economy to develop that squeezed the last drop of juice out of these people. This all used to be pretty different, you know, in the days before Western corporations decided they needed to go global to make even more profits.
I agree blaming the poor is unfair. This was the fault of the Fed and too low interest rates, de-regulation, and Wall Street inventing new mortgage products and laughing all the way to the Bank with the bailout. Oh corrupt Congressmen like Barney Frank, Chris Dodd, et all played a part along with greedy realtors, Bush co. and mortgage brokers. The poor were not at fault and often did not understand the new mortgage packages and the fine print along with most people in the Middle Class.
But I will also say that credit standards are a good thing as they keep prices low as less buyers will qualify. As someone with good credit who rented throughout the housing bubble and refused to get into an ARM, or SUBPRIME Loans etc, I will say that renting is always an option for people. Renting is not a bad alternative especially in this market when you can rent homes for far cheaper then you can purchase them in many parts of the country. I plan to rent until things are affordable again and I am what you would call Middle Class. www.patrick.net is a good website to understand the bubble that blogger saved my butt from buying an overpriced home.
I agree. The whole blaming the crisis on "Sub prime debts" is like saying the banks just oopsed in lending to poor folks.
A lot of the reason why people are defaulting on their credit cards is the companies pushed the cards on their banking and mortgage customers at a 0% apr, then after six months or a readjust, their rates jumped to 28%. Then they start tacking on fees and penalties to where the customer cannot possibly pay their cards off. Then they reduce the credit limit for a readjusted customer and Wham! now the customer's credit rating tanks as they're maxed out and penalized up the yang. The minimum payment is 4% because they want you to keep paying 30% for twenty years.
Congress needs to restrain the banks. Continuation of these policies is draining the American consumer of cash. Our purchasing ability is dependent on credit ratings and ability to receive a loan in order to purchase bread. Also, one's ability to get a job or housing is dependent on credit history. And every time someone checks a person's credit, that person's credit rating goes down.
No bueno.
After college: college loans to pay off.
Credit card debt for life.
Mortgage debt for life.
The consumer has no real money--we have ceased to be wage slaves and are now credit slaves.
Plenty of people go through life without credit cards. I do not own one just a debit card with overdraft protection. I am not rich but I do save money and wait until I can afford something before I buy it.
PBS has this great documentary on the credit card. It's called the history of the credit card or something like that. Google that video.
I hear about 'failed' states. . . is the U.S. too big to fail?
If the U.S. had universal health care like other civilized nations then people
wouldn't be defaulting on their charge cards over their children's medical bills.
I would say it's just the opposite-- if the U.S. is too big to do anything, apparently it's too big to NOT fail.
Right on!! Our family's best friend family lost a child to leukemia earlier this year. What's more heartbreaking than that? Easy... collectors calling for payments that haven't even been billed to the family or processed by insurance yet. Every one of those calls just heightens the pain of their loss. It is time for universal single payer health care to stop these injustices.
I have no sympathy for Citicorp. They bought out my Sears account, changed the terms without notice, charged late fees and had dropped the credit limit without notice and tried to charge for that when we exceeded the new lower limit that was below our old limit. If consumers can't afford the changes to the original terms they signed up for, then it's an artificial default that Citicorp has created, not the consumers.
Congress keeps creating and sanctioning more companies that are "too big to fail", thereby rationalizing more taxpayer-funded bailouts.
By allowing Bank of America to buy Countrywide and Merrill Lynch, encouraging a GM/Chrysler merger, and encouraging banks to buy other banks with some of this month's trillion dollar bailout money, Congress is creating ever larger "too big to fail" companies that will require ever larger taxpayer-funded bailouts.
Unless the leaders of the companies that caused the financial meltdown, Alan Greenspan, Ben Bernanke and their Congressional co-conspirators are jailed, they will keep getting richer and the US taxpayer will continue to fund the ever accelering downward spiral to fascism and third world status.