Credit Cards: Higher Loan Losses Mean Higher Interest Rates

FT Alphaville is reporting that the credit rating agency Fitch puts credit card losses at 10.4% of outstanding loans. This is a record. Bad news if you are a credit card company. So, what does one do in that situation? You raise rates on customers that are paying, silly.

Citi’s (C) rate increases emerged on the day the government proposed legislation to create a new regulator with sweeping powers on consumer protection and a week after the bank was attacked by some politicians for raising employees’ salaries.

Holders of co-branded cards who failed to pay their balance in full at the end of the month saw their rates rise by an average 24 per cent – or nearly 3 percentage points – between January and April, according to a Credit Suisse analysis of data from the consultancy Lightspeed Research.

Now, remember, insurance companies do the same thing - jack up rates for those that can pay to make up for the losses on those that can’t pay. But the optics here are not good – with Citi being bailed out by government and Obama calling for consumer protection at the same time as Citi is piling on interest. It should be interesting to see if the Obama people have anything to say about this.

The Alphaville post by Stacy-Marie Ishmael is interesting because it does suggest that off-balance sheet losses are going to be an issue here.

I have two thoughts on the larger issue of credit cards.

1. The banks to watch are Citi, JPM and BofA (BAC), and Capital One (COF) as they all have huge credit card outfits. My eyes are on JPM because they are the bellwether of the industry now. Back in November, I warned that they were highly leveraged to the real economy. So while they have escaped fairly well to date, let’s see what kind of beating they take going forward. This will be instructive to the health of U.S.banking.
2. One would normally expect a slew of writedowns. After all, it was writedowns on marketable securities which blew up the credit crisis in 2007 and 2008. But FASB has fixed this problem. So, let’s see how many writedowns result. In truth, credit card debt used to be discharged in consumer bankruptcy. But the credit card lobby fixed that problem in 2005. Now, the credit card companies may still be able to get their pound of flesh even if one files for bankruptcy. The key is whether you have a job or not due to a new bankruptcy means test. The long and short for me is this: in the real world, since a high percentage of people defaulting on credit cards have lost jobs, we should expect the recovery rate to be much lower due to debt discharge in bankruptcy. This should lead to a lot of writedowns at the likes of Citi, PM and BofA. But given recent FASB guidance on accounting for mark-to-market, it is anyone’s guess at this point.

Any way you look at it, though, higher loan losses mean less revenue. How this gets reported over the near term is another matter altogether.

Comments

[Larry House:]

Citi raised rates before that date as well. Just got a notice yesterday that the interest rate on a card I have is going up. I expect much more of that over the next several months. If anyone is investing in stocks while carrying a balance or balances on credit cards, stop and think. Do you really think you are going to make 11-19% in stocks? If you pay off or pay down the credit card, the return is a sure thing. I propose a Credit Card Tea Party--pay them off! That is the only clout we have to fend off being raped by the credit card companies.

Jul 01 04:17 PM

[effeff63:]

Somehow, carrying a credit card has made the card carrier with good credit habits an unintended member of an insurance pool for the card issuer. The good must make up for the bad risks undetaken by the card issuers ? We pick up the banks and dust them off after they trip and stumble over their own greed driven risk taking, and now we have to indemnify those same banks for the poor credit risks they choose to continue to pursue.

Jul 01 04:49 PM

[Edward Harr...:]

I think you have the gist of it down pretty well. The question is whether Obama will stop this kind of thing because he says consumer protection is necessary. Don't hold your breath.


On Jul 01 04:49 PM effeff63 wrote:

We pick up the banks and dust them off after they trip and stumble over their own greed driven risk taking, and now we have to indemnify those same banks for the poor credit risks they choose to continue to pursue.

Jul 01 08:08 PM

[sleeperhold:]

Slavery is alive and well in America: It is called Credit Card debt. However, good news. Credit Card companies are destroying their own industry. Many merchants are now providing a 2% discount if a customer pays in cash. Also, the millions of customers closing accounts or refusing to use the cards, means again, no fees for credit card providers.

If the credit card issuers were smart, they would hold the line at this point and start providing incentives for customers to use their cards. The public is tired of clearly being taken advantage of and Congress and Obama's so-called credit card protection act, which doesn't go into effect until next year--curiously...Hmmm... and his Congress talk about "helping American families", yet the help is to the banks so they can "earn" their way out of this crisis. Long run, banks will suffer tremendously when customers get the upper hand and checking accounts will no longer be free. Just my prediction. Lowly little guy from Brooklyn.

Jul 02 02:32 AM

[TradingHelp...:]

Credit card companies have perfected the art of hooking customers then ripping them off. It's just re-distribution of wealth from those desperate, or foolish, enough to spend more now than they earn, to the banks. Again.

In the good times the banks coin in a nice profit. So they are tempted to endlessly dilute credit checks (on mortgages as well) to the point where the debt bubble bursts. As we have seen.

Then the same over-taxed, over-indebted consumers feed the banks again via government cash intervention measures to save these systematically important institutions that grow and prosper at the expense and suffering of the working man.

And I am unsympathetic to the view "don't take a credit card unless you can cope with the debt". It's up to the sector and the government to regulate and control borrowing.

Credit card companies are the lowest form of corporate 'life', sucking the cash from the man on the street with extortionate interest rates and penal charges. Shylock ain't got nothing on your credit card company.

Jul 02 04:36 AM

[Edward Harr...:]

That is exactly the point: we need Congress and the President to make the rules to stop abuses. If we allow any sort of corporate behavior, the we will get any kind of behavior, including predatory lending and usury.

We need our representatives to step up and take considered action. The more I see this under Obama, the more disappointed I become. Isn't he supposed to be change?

On Jul 02 04:36 AM Michael Young wrote:

And I am unsympathetic to the view "don't take a credit card unless you can cope with the debt". It's up to the sector and the government to regulate and control borrowing.

Jul 02 07:26 AM

[drpaul1139:]

Forget Obama! Forget Government!

Are we waiting for Obama and Government to pay our mortgages and credit card debts?

Where is the American spirit of solutions and can do! All of this whining about what government should do is staring to sound like the whines of 3rd and 4th world citizens!

Listen to yourselves! You asked Obama to be the President to solve this mess and he gave the US $10 trillion in more debt, and more $trillions of debt is on the way!

Obama and government cannot solve this problem! Only new types of corporations started and owned by the consumers, structured for the consumers will solve this problem! This customer owned solution is immediate!

It is out responsibility to find the solution to this mess! We can keep going around and around and around…and this will keep the circle going…

But until we step out of the circle and find out and then see exactly what is the problem then we will keep taking in circles! We know that ‘negative-debt’ is the problem!

Now if we do not know how to ask the simple ‘positive-equity’ question then this is different story altogether!

Read the two articles and shift the focus, shift the energy into a positive-equity direction.

The death of credit, debt, boon-bust cycles and unemployment
www.productequityvalue...

How credit, debt, and interest is replace by equity
www.productequityvalue...

C’mon guy’s let’s question, learn and get with an ACTION solution that we consumers can all join in on…this is better than doing nothing but talking!

Jul 02 12:25 PM

[friar tuck:]

sleeperhold's got it right. this economy still works by supply and demand. we demand less gas, gas goes down and when we demand less and less credit the interest rates will go down. it may take a few years but if we all payoff the cards and refuse to use, we can bring the banks to their knees begging us to accept their so called "services". we don't need washington and their toothless protection for consumers. a credit card "tea party" will do the job. this truly is in our power and we need to spread the word. no more credit/ pay with debit.

Jul 02 12:33 PM

[maryanne:]

Whatever happened to PERSONAL RESPONSIBILITY ? Don't charge more than what you can afford! Those who are irresponsible should pay higher interest rates NOT make the responsible cover those deadbeats by being hit with annual fees.

Jul 06 08:13 PM