When American consumers could no longer fund spending by extracting equity from their home ATMs (as of a year ago), they turned to another source of financing: credit cards. Now many of those loans are starting to go bad.
As consumers stop paying their credit card bills, banks will tighten credit lines, which will cut off another source of funds for consumer spending (even for those who would have paid their bills).
So where will consumers turn once credit cards are maxed? Anyone’s guess. Some will turn to layaway plans, but most retailers don’t offer those. More likely, consumers will cut spending even further.
WSJ’s Robin Sidel: More credit-card holders who fall behind on their payments are eventually defaulting, deepening losses for thousands of banks that issue plastic.
The worsening trend indicates that charge-off rates among credit-card issuers, which stood at more than 6% in the third quarter, are poised to rise more than expected in the fourth quarter and into next year. That means additional misery for financial firms already besieged with losses on everything from soured mortgages to bad bets on capital markets.
Card-industry executives are worried about escalating “roll rates,” a term that refers to the percentage of cardholders who go from merely late on their payments to not making them at all. Among cardholders who are between 60 days and 89 days overdue, about 20% of such card balances eventually are being charged off by card issuers as uncollectible, according to Auriemma Consulting Group Inc., a Westbury, N.Y., financial-services consulting firm. The percentage is up by about a third from last year, before the U.S. economy tipped into recession.
The problem can be even worse for bundles of outstanding credit-card balances that are securitized by some of the largest issuers. For example, American Express Co.’s roll rate worsened to 47% in the third quarter from 35% a year earlier, says investment bank Keefe, Bruyette & Woods Inc., which calculated the figures from securities filings. At Capital One Financial Corp., known for its cheeky ads and mass-market strategy, the roll rate has reached 34%, up from 28% in last year’s third quarter. Those figures don’t reflect credit-card loans that the issuers keep on their books.
Much of the surge is being blamed on rising unemployment, typically a leading indicator of credit-card performance. November’s loss of a half-million jobs will make it impossible for even more cardholders to make their payments on time. Others who already are delinquent in their payments will be unable to catch up.
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