Credit Card Defaults and Charge-Offs Rise

If you’re wondering why credit card issuers are tightening guidelines, cutting credit lines, and refusing more applicants, look no further than credit card default data.

American Express, the largest U.S. charge card operator by sales volume, said its annualized net charge-off rate rose to a record high 8.80 percent in March, meaning nearly one in ten delinquent credit card accounts could never be paid back.

Similar numbers were seen at other leading credit card issuers, including Chase, Citi, Bank of America, and Discover.

On a positive note, American Express said its rate for loans at least 30 days delinquent, an indicator of future defaults, slipped lower during the month to 5.1 percent from 5.3 percent.

That could be an indication that measures to reduce risk are paying off, such as reducing credit lines of higher-risk customers and more carefully considering new applicants.

But Citigroup, one of the largest issuers of MasterCards, said its default rate rose, indicating more stress ahead for one of the largest U.S. banks, especially with unemployment numbers rising.

Unfortunately, there are a number of forces working against the credit card issuers, including unemployment, falling home prices and a subsequent lack of home equity, which used to bailout spenders during the boom.

The card issuers are even working against each other, by denying new credit to customers who might otherwise have executed a balance transfer to give themselves some breathing room.

Card issuers have also been raising minimum payment requirements as well as interest rates, which could lead to more defaults as borrowers struggle to keep up with larger payments.

But the moves are aimed at getting outstanding credit lines paid down quickly, especially for those who like to carry balances, thereby reducing their risk exposure.

CIBC analyst Meredith Whitney estimates that $2 trillion in credit card lines will be expunged from the system by the end of this year, which could make it difficult for many who rely on credit, especially those who have recently lost their jobs.

(photo: poopfaceproductions)

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