It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead.
Debt threat: Millions in the US may not be able to pay off debts, leaving a gaping hole at banks still trying to recover from the housing bust. Bloomberg
The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.
Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000-20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”
In the meantime, he said, “I’m just doing what I can.”
Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.
The bank stress test results, released on Thursday, suggested that the 19 biggest banks in the US could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a “worst-case” economic situation.
But if unemployment breaches a 10% peak, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express Co. and Capital One Financial Corp., one-fifth of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America Corp., Citigroup Inc. and JPMorgan Chase and Co., about a quarter of card loans are expected to sour.
Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.
In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element included in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets.
What’s more, the peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. That suggests that if the unemployment rate gets much worse, credit card losses could be worse than what regulators projected.
And many economists expect the number of job losses to climb even higher. On Friday, the unemployment rate reached 8.9% as the economy lost 539,000 jobs. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, are traditionally closely aligned, because consumers who lose their jobs are more likely to miss payments.
Banks wrote off an average of 5.5% of their credit card balances in 2008, while the average unemployment rate was 5.8%. By the end of the year, the rate of credit card write-offs was 6.3%; more recent data was not available.
Experts predict that the rate of credit card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9%.
“We will blow right through it,” said Inderpreet Batra, a consultant at Oliver Wyman, which specializes in financial services.
After writing off about $45 billion in bad debts during 2008, credit card lenders are bracing for the worst year in the industry’s history. Not only are losses spiralling, but also lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profits. This week, the Senate is expected to take up the Credit Cardholders Bill of Rights after the measure passed in the House with a strong bipartisan vote of 357-70.
President Barack Obama over the weekend pressed lawmakers to sign the credit card reforms into law by Memorial Day, and he plans to push the cause again at a meeting this week in Albuquerque, New Mexico.
The legislation would curb the ability of card issuers to raise interest rates retroactively on consumers and would require them to reduce hidden fees and penalties.
Lenders argue it would limit access to credit for many Americans.
©2009/THE NEW YORK TIMES