Credit Card Default Rates Continue To Trend Higher

In news that really shouldn't surprise anyone, many top credit card issuers in the United States reported that they witnessed a record number of defaults in May.

Bank of America was especially hard hit in May, as their default rate jumped to 12.5% from 10.4% the month before.

American Express, Capital One, JP Morgan Chase & Co., Discover and Citigroup all reported increased default rates in May.

Credit card defaults are "loans that the companies do not expect to be paid back". These are amounts that have gone past the delinquency stage.

Speaking of which, delinquency rates fell in May, however analysts believe that this is more of a seasonal trend, and not necessarily an indication that things are improving. Analysts say that many people who are delinquent have used their tax refunds to pay off at least part of their balances. With unemployment rates continuing to rise, analysts believe that credit card delinquencies rates will resume their upwards march in the coming months.

The root causes for the spike in credit card default rates are pretty clear to see. They are:

1. Rising unemployment rates. Many Americans are turning to credit cards to help pay the bills while they are out looking for work. This obviously creates situations in which people get neck-deep in debt, and eventually can't pay.

2. Increasing interest rates. The ultimate Catch-22. Credit card companies are justifying an increase in interest rates on a spike in delinquencies and defaults. A spike in rates means that many people simply can't pay off their credit card debts, and they eventually are forced to default.

3. Drop in real estate values. Many people relied on the upswing in the real estate market to finance their lifestyles. Hundreds of billions of dollars of home equity loans were taken out at the top of the real estate market in the States - many people then turned to credit cards to continue to finance their lifestyles. This resulted in an eventual surge in default rates as the economy went south.

4. Aggressive marketing during the "boom" years. Many credit card issuers aggressively targeted subprime borrowers during the "boom" years. This has obviously come back to bite them, as these borrowers lead the way in delinquencies and defaults.

Until people are able to find jobs and get some money into their pockets, I don't anticipate a meaningful drop in credit card default rates. Many people simply aren't able to make a dent in their balances right now.

Source: U.S. credit card defaults rise to record in May

Filed under: The Economic Meltdown