30 Mar Credit Card Charge-Offs Hit 6.3% Last Year
Banks had to write off as uncollectible over 6% of their credit card balances in the last three months of 2008. If this is what “nearing the end of a recession” looks like, let’s hope it ends soon.
We have reported here about the banks (and American Express) cutting credit lines to reduce their exposure to consumers falling behind or completely failing to repay, as well as cutting down on their required capital levels. But at the current rate of charge-offs of their credit card portfolio, the large banks that issue most of the credit card debt are going to need to generate hefty returns on their performing loans to cover the growing losses on unsecured consumer lending.
So don’t expect to see the banks suddenly see the light and cut fees and rates on your credit cards or overdraft accounts any time soon.
Ironically, I am hoping this is a good sign. First, hopefully this means that the banks have enough capital to be able to admit they have to write these balances off. During the Lost Decade, the Japanese banks appeared to only write-off bad loans when they’d saved up some capital to cover it. In other words, your loan was still called an asset on their books if they were about as broke as you were — each lying to other about the loan being good eventually.
Second, I hope that the credit card default data show that hard-pressed consumers are focusing on paying their priorities first. Paying their mortgage and living expenses first. If they have the money to pay the card debt, great. Otherwise, Uncle Citibank may have to wait. Things get bad quickly when you don’t pay the cards but not as bad as not paying the mortgage. It’s called lifeboat economics: When you’re in the lifeboat, you have to conserve your resources.
The next couple quarters will tell us if either of those hopes is borne out.
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