In the wake of the credit crisis and rising unemployment, credit card companies have been hit with record credit card default rates. According to the most recent statistics released in July of 2009, default rates show little sign of letting up.
Bank of America reported the highest default rate, which increased from 12.5% to 13.8% from May to June, a jump of 1.3%. Citigroup came in second with a default rate of 10.5%, unchanged from the month before, and American Express and Capital One almost tied for third place with June default rates at 10.0% and 9.73% respectively.
It’s Business Management 101 that when a company loses revenue in one area, it will seek to increase income in other ways, and credit card companies are no exception. For millions of consumers, this has already meant increasing interest rates, credit card fees, and lower credit limits.
In the case of Bank of America, the biggest bank in the U.S., the rate of increase is particularly troublesome. A 1.3% increase on 12.5% translates into a 10% increase in default rate in as little as one month, a scary statistic that will make any credit card exec sit up and take notice. If defaults stay at this level, Bank of America will be forced to walk away from almost 14% of its outstanding credit card loans, translating into billions of dollars in lost revenue every year. Overall revolving debt, most of which is credit card debt, was at $936.6 billion through the first quarter of 2009, according to the Federal Reserve.
Economists expect the default rate to continue to increase as long as unemployment is on the rise. However, one silver lining may be that for some card issuers, default rates stayed steady from May to June, and in a few cases even declined slightly. JP Morgan Chase saw its default rate decrease from 8.36% in May to 8.04% in June, Discover’s default rate fell from 8.91% to 8.75%, and Citigroup and American Express stayed about the same. It’s unclear, however, whether the slight changes in the default rates of these issuers indicate that default rates are stabilizing, or if they simply result from households using tax refunds to pay down their credit card debt.
With rising unemployment, industry observers predict that the average industry default rate could go as high as above 12% by the first quarter of 2010.
The continued high default rates are bad news for consumers. Until the economy improves, expect credit card companies to continue to take steps to increase revenue to offset their losses from defaults. For cardholders, this means that the days of escalating credit card interest rates and penalty fees are not over. Interest rate hikes in particular are likely to continue to intensify before August of 2010, when the new credit card legislation steps into effect and puts curbs on card issuers’ ability to raise rates.
