Unemployment Rates Continue to Haunt Credit Card Issuers

By Eva Norlyk Smith, Ph.D.

The latest data on credit card defaults and delinquencies show few signs of improvement. Several major U.S. credit card companies are still facing double-digit defaults, suggesting that the high rates of unemployment continue to weigh down consumers.

While credit card defaults came off their highs of the last few months, they remain elevated compared to the average of years past. Worse, delinquencies rose from September to October, a harbinger of further losses ahead. Delinquency rates are a measure of credit card payments that are more than 30 day late, and hence an indication of future credit card charge-offs, i.e. payments more than 60 days late.

Bank of America continued to have the highest level of charge-offs at an annualized 13.22 percent, down from 14.25 in September. Citigroup saw the highest drop in credit card write-offs, from 10.15 percent in September to 8.79 percent. Other card issuers reported modest declines in defaults from September to October: Chase cards from 8.12 percent to 8.02 percent; Capital One from 9.77 percent to 9.04 percent, and Discover from 8.69 percent to 8.54 percent.

The slight decrease in credit card defaults resulted from a slowdown in delinquencies over the past few months. Unfortunately, delinquency rates rose in October for most credit card companies, an early warning of more trouble ahead. With the holiday shopping season just around the corner, cash-strapped consumers may turn to their credit cards to make the season bright, possibly setting the stage for more delinquencies down the road.

Capital One saw 30-day delinquencies rise from 5.38 percent in September to 5.72 percent in October, and for Discover card delinquencies rose from 5.57 percent to 5.72 percent. The one exception was American Express, which continued to buck the trend, reporting the lowest delinquencies of all major card issuers at 4.1% in October, unchanged from September.

Credit card default rates are tied to unemployment rates, and unfortunately, so far there are no signs of an improving job market. On the contrary, unemployment levels reached a record 10.2 percent in October, its highest level since the economic recession in 1982, and almost double the target unemployment rate of 5 or 6 percent.

Under the best of circumstances, it typically takes several years of strong economic growth for unemployment rates to decrease in any significant way. Unfortunately, with the Fed funds rate already at near zero, the Fed has exhausted its traditional weapon for stimulating economic growth, and economists predict that we might have to wait years for a substantial recovery in the job market.

The high credit card default rate is bad news for cardholders. Credit card issuers are likely to continue to shore up risk and take steps to stem the tide of losses. For cardholders across the board, this means that the era of tougher credit card terms, reduced credit limits, tougher lending standards, and higher interest rates is not likely to be over anytime soon.

Published: November 17, 2009