Credit Card Companies Report Record Defaults

It looks like it’s more bad news for credit card companies. All of the major credit card issuers reported seeing record default rates in the month of May. It is quite clear that consumers remain financially stressed as the economy continues to falter. There is a direct correlation between the rising unemployment rate and the number of credit card charge-offs industry wide.

There was a bright spot in the data, but experts quickly dismissed that as a seasonal glitch. That bright spot was falling delinquency rates across the industry. Experts dismiss this based on the fact that every year at this time delinquency rates fall because consumers use their tax refund checks to pay their bills. And of course, when that money is gone, it’s gone.

As stated earlier the unemployment rate is really the guiding force behind these record charge-offs. The concept is quite simple really, when people lose their jobs and their sources of income they are no longer in a position to pay their bills. We as Americans tend to live from paycheck to paycheck so when it dries up so too does our ability to meet our financial obligations.

Until the unemployment rate stabilizes, and in fact begins to decline, we will be seeing more of the same. Some regions throughout the country have been hit harder by unemployment than others including the most populous state, California, so their credit card default rates are higher than the rest of the country. Florida is the 4th most populous state and they too have been hit harder than most by unemployment.

We have spoke of both the default rate and charge-offs in this post so I think it is important to clarify to avoid confusion. Both of these terms represent the same thing, loans that will never be repaid.

Let us take a look at how the individual credit card companies fared.

Bank of America saw the largest number of charge-offs with their default rates soaring to 12.5% for the month of May. That is up from 10.47% from the prior month. They were hit the hardest when compared to all U.S. banks because they have the largest exposure to subprime lenders. It was Bank of America, if you will recall, that thought it was a sound financial practice to give credit cards to illegal aliens.

American Express is the Goliath of the credit card industry. They are responsible for issuing nearly a quarter of all credit and charge cards in the United States. Their default rate reached double digits in the month of May topping out at 10.4%. That was up from 9.9% in the month of April.

Citigroup is the largest issuer of MasterCard credit cards and they reported a rise in the default rate for the cards that they issue as well. Charge-offs reached 10.5% in May as compared to a 10.21% increase in April.

Capital One saw its default rate rise to 9.41%, up from 8.56%.

Discover Card Services stated that their charge-off rate rose from 8.20% in April to 8.91% in May.

Chase fared the best of all the major credit card issuers. J.P. Morgan Chase is the largest issuer of Visa credit cards and the second largest bank in the United States. They saw the most modest rise in defaults. Their default rate was 8.30% in May, up from 8.07% in April.

Most experts agree that while the unemployment rate continues to rise, defaults will continue to reach record highs. The consensus is that there will be no improvement over the next 12 months unless we see a drastic rebound in the unemployment numbers. But alas, that is not very likely. Credit card industry experts and economists estimate that capital losses from credit card defaults may reach as high as $70 billion.

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