Why Credit Card Defaults Affect All Consumers

On Monday, it was reported that credit card defaults reached a record high. Companies such as Capital One (COF), Bank of America (BAC) and America Express (AXP) said their defaults rose to surpass 10% since the month of April.

Credit card defaults are essentially loans companies don’t expect to be paid back. Companies who provide sales on credit or depend mainly on credit sales for their businesses, such as credit card companies, always put aside money in accounts they will use to make up for the loans they don’t expect to gain back. These accounts are sometimes called Doubtful Accounts.

Now as a credit card holder, you may be wondering: “How does this new information affect me?” We’re sure many of you are on top of your bills and are paying them off, even if it’s just a little bit more than the minimum. So obviously you’re thinking: “I’m not among those counted in this new data, so it shouldn’t affect me.”

Sadly, it does. It affects all of us.

Imagine you’re the CEO and top executives of these companies. You’re looking at the numbers and they’re not looking good.

• Bank of America: 10.47% to 12.50%
• American Express: 9.90% to 10.40%
• Capital One: 8.56% to 9.41%

Considering you’re the ones in charge of the company, you know the company’s success depends on your decisions. So you realize that if your customers aren’t paying back their loans, it’s because they can’t afford to. You also come to understand that because they don’t have cash to spend, they are coming to depend on their credit cards to pay for their everyday costs even when they know they won’t be able to pay the bill once it comes.

With their credit card limits in the hundreds, or thousands in some cases, you know they have access to credit they can’t afford. You fear they’ll max their cards out and not pay their bills, so what do you do?

You slash their credit limits across the board.

Yes, that means you too because even though you’re a loyal consumer who is always on top of their bills, they’re afraid your circumstances could change at any minute in this volatile and delicate economy, and soon you might become another credit card default.

That’s not to say this will happen but it’s something that has a great chance of happening because their reasoning is logical, no matter how much it may hurt us: the innocent consumer.

So just be advised and on the lookout for any new announcements or changes from your credit card companies.

You wouldn’t want to get caught with your hand in the cookie jar and then realize you can’t afford your favorite cookie.

Comments

[David White:]

Yesterday S&P cut the ratings on 18 US banks. It cut COF's rating to BBB/Negative. This doesn't sound promising for COF's near term price performance (or earnings performance).

Jun 18 10:01 AM