While 2008 brought us the worldwide credit crisis, 2009 marked the year when the worldwide credit crisis turned into a credit card crisis, as cardholders around the globe careened from credit binge to credit bust.
Quick-what is more ubiquitous than Santa sightings in December and more contagious than the H1N1 swine flu?
Credit card afflictions. While 2008 brought us the worldwide credit crisis, 2009 marked the year when the worldwide credit crisis turned into a credit card crisis, as cardholders around the globe careened from credit binge to credit bust.
U.S. credit card defaults, i.e. credit card debt more than 60 days behind on payments, rose steadily throughout the year and finally reached record levels in September at more than double the average default levels over the past decade.
In many countries overseas, the picture was equally bleak. In the U.K., consumer credit card debt almost doubled in the third quarter of 2009 to become the largest debt category in the UK, according to the Financial Times. In addition, U.K. credit card defaults, according to the ratings agency Moody’s, kept pace with those of the U.S., rising from 6.4 percent to 9.37 percent between May 2008 to May 2009.
Canadian cardholders weren’t faring too well either. Again according to Moody’s, Canadian credit card defaults reached spiked almost 60 percent in the second quarter of 2009 compared to the same period in 2008, reaching record levels never before seen.
Even in several Asian countries, where credit cards have only recently become a payment instrument of choice, credit card defaults are on the rise. According to the People’s Bank of China, the number of credit card payments overdue for more than six months increased by 30 percent from the second to the third quarter of 2009, and more than doubled compared to the same period last year.
Like their Western counterparts, Chinese cardholders are affected by the weak global economy, which has spurned record lay-offs in China as well. Credit card defaults tend to mirror unemployment rates, when consumers struggling to make ends meet are forced to turn to credit cards to tide them over. In addition, like U.S. banks, Chinese banks have been much more aggressive in issuing credit cards over the last few years; casting a wide net that caught many borderline creditworthy consumers.
Korea is facing similar troubles in the wake of an economic recovery in large part fueled by a consumer borrowing binge. With the benchmark interest rate set by Bank of Korea at a historic low of 2 percent, banks have been pushing credit card deals on consumers in an attempt to take advantage of the cheap credit. With both mortgage debt and credit card debt up, experts warn that Korean consumers are dangerously leveraged, with credit card spending making up nearly half of all private spending, and credit card defaults increasingly on the rise.
Are there any countries immune to the global credit card pandemic? Well, Germany along with several other European countries, may have remained relatively unaffected by the rollercoaster ride from credit binge to credit bust.
“We have noticed that many German customers exercise a very strong controlled behavior,” says Matthias Hoehnisch, director of credit card business at Germany’s National Savings and Loan Association to Deutsche Welle, a German news service. “Using credit cards to roll over debt is not done in Germany.”
The reason is not necessarily that our Germanic counterparts are more fiscally responsible, but that most credit cards in Germany, as well as other European countries (but not the U.K.), are charge cards, which have to be paid off in full each month. In contrast, most U.S. credit cards are “revolving cards,” which allow cardholders to pay off as little as two percent of the balance on the card each month. In Germany, nine out of ten cards are charge cards, on which it is impossible to accumulate any serious levels of credit card debt.
The take home lesson for consumers? To protect yourself from being infected by the epidemic of credit card malaise, try this old, time-tested European home remedy: pay off your credit card balance in full each month.
