Default Rates of Credit Card Issuers

Predictably, the financial crisis that we seemingly have weathered has hit credit card issuers especially hard. American Express, Discover, Capital One and Bank of America offer a window into how bad the economy was and charts a course for its improvement.

The giant credit card processors Visa and MasterCard make their money by charging a fee every time a purchase is made based on the total amount of the purchase so they didn’t get hit nearly as hard as the issuers because they do not suffer from defaults and delinquencies. Their business suffers when people stop using their credit cards and that too has happened to an extent.

American Express is an interesting case study. They typically deal with higher end (better credit ratings) consumers and businesses while staying away from people that are considered to be a greater credit risk. Because of this, Amex has always had one of the lowest delinquency rates in the credit card industry.

That however was not the case in the beginning of 2008 when American Express suddenly found itself in the unenviable position of being an industry leader as far as delinquency rates go. That was brought on mainly because of their huge exposure in California and Florida, two states that were hit especially hard by the real estate collapse.

Since then American Express has bounced back to once again have the lowest delinquency rates in the credit card industry. They did it by aggressively reigning in risk by not only becoming very particular about who they issue credit cards to, but also by closing the accounts of customers that they felt were credit risks.

The news for Bank of America, Capital One and Discover Financial Services is nowhere near as rosy. In fact, they continue to see rising delinquency rates because of their overexposure to account holders that do not have strong credit ratings.

Credit card issuers as a whole will find relief only when we begin to see the unemployment numbers come down nationally. It was a hard-earned lesson but one would believe that they now understand the perils of issuing credit cards to just about anyone regardless of their credit history.

On the other hand, as we recover from the worst economic recession since the Great Depression, when things do get better we may see the credit card companies fall right back into their old ways by issuing credit aggressively in order to prop up their profit margins.

Only time will tell.

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