U.S. Credit Card Industry Moving into Uncharted Territory

The combination of slumping housing prices and rising unemployment risks putting the credit card industry into uncharted territory, according to Moody’s.

Credit card performance deteriorated further in the first quarter by several measures, “but with excess spread at near-historic highs, most trusts appear to be well positioned to withstand a worsening credit environment - even if losses exceed former post-recession peaks.”

That said, Moody’s outlines some disturbing trends in the sector in a Special Report.

The charge-off rate rose to 5.71% in 1st quarter 2008 from 4.49% posted in the same period a year ago.

This marks the fifth quarterly year-over-year increase in the charge-off rate after twelve consecutive quarters of improvement that began in 1st quarter 2004 and marks the first time quarterly charge-off rates have risen above 5% since the October 2005 change in the personal bankruptcy law.

In March 2008, the charge-off rate rose to 6.05% from 4.64% a year ago. The charge-off rate measures those credit card balances written off as uncollectable as an annualized percent of total loans outstanding.

Generally, the charge-off rate has followed the unemployment rate point for point, Moody’s notes. That one-for-one relationship may not hold for the current credit environment though, since technical factors (the rise in bankruptcy filings) are expected to push charge-off rates higher even if the unemployment rate were to remain relatively flat.

The combination of an unprecedented decline in housing prices and rising unemployment, in addition to the normalization of bankruptcy filings, arguably places the industry in uncharted waters. Meanwhile, growth in revolving consumer debt and rising fuel and commodity prices will put more pressure on households’ debt service and financial obligations ratios, which are already at near-record highs.

The delinquency rate, which can be an early indicator of future charge-off rates, is also on the rise. In March, this rate was 4.57%, the highest it has been since March 2004. Interestingly, though, the early-stage delinquency rate (i.e. card balances one to two payments past due) has been relatively stable for the past six months; however, the late-stage delinquency rate (i.e. card balances three or more payments past due) continues to rise.

This apparent dichotomy between the trends in early- and late-stage delinquencies may be indicative of an ever more challenging collection environment. That is, once cardholders fall behind in their credit card payments, it is increasingly difficult for them to become current on their payments again.

Comments

[JohnPseudonym]

The Fed will jump in and save the credit card companies. Personally, I'm running up as debt as possible with no intent to ever pay it off.

Hey, if they're willing to give me the money, I'm not willing to pay it back:)

Don't worry, keep spending, the government will make it all better.

[AndrewHorowitz]

Smart. But the data is a bit old. None the less, it is still a wonder how it has taken Moody's so long to figure this out. There is much hope resting on the side of the bulls. But anyone who has been to a rodeo know what follow the bull.... clowns and crap.

See more on credit issues and hear on The Disciplined Investor Podcast

www.thedisciplinedinve...

Andrew

[RichardSchweitzer]

Am I missing something? Do Visa and MA carry the credit risks of card issuance and use?

If so, why do cards carry a "Chase" designation; or Citi, etc.

There ought to be some clarification as to how and why; and from what sources V and MA make their money. Is it really from extensions of consumer credit a la COF? If not, please expalin the application of the above.

[LarryH]

V and MA carry no credit risk. They do not issue credit cards. Various banks, etc. do that. V and MA make money every time a credit card (of the respective type) is used. V and MA are in the sweet spot--make money on the credit card transaction and no credit risk. The numbers indicate that as consumers are squeezed more, they are increasing the use of their credit cards--more money for V and MA--greater credit risk for the card issuer.

[mike dubs]

Visa and Mastercard earn fees on each transaction as they provide the system that draws money from one account and deposits it into another, ie. your Chase credit card to Best Buy's account when you buy a new TV.

The banks that issue the credit card's will be the ones who need to be saved by the government if more and more debtors become defaulters. Those defaulters lose by having horrible credit scores that will take them over 7 years to repair. If the government steps in, the inflation rate will move higher and tax payers will ultimately carry the burden.

I would rally prefer the credit markets to crash instead of further government interference. Hopefully, there arent too many John Pseudonym's out there.

I believe the rate of late-stage delinquencies is a leading indicator for the rest of the market as crisises start at the bottom.

[DavidJackson]

Due to the comments above, I added tags to this article for JP Morgan Chase, and also Discover and Amex.

Is it correct that Discover and Amex do carry credit risk?

[iThinkBig]

It has become very simple for me since I looked at multiple variables of the health of the U.S. economy in June of 2007. The easy credit led economy which fueled our GDP in 2003-2007 created massive unsustainable public and private debts. The public debt serviced by foreigners is shrinking meaning investor confidence in the U.S. financial system has been temporarily destroyed. Between inflation caused by currency devaluation, wealth destruction in real-estate, energy consumption costing consumer 25% of monthly disposable income (I didn't include food), offshoring and lack of job creation (rather permanent skilled job destruction) the total net loss calculation was 8 Trillion dollars of wealth destroyed in a four year cumulative period. Or GDP showed -20 percent cumulative over the same period. Umm, isn't that a depression?

The entire U.S. financial system may just collapse, I hate to even think that is possible, but IT IS. If it does not, I speculate it will be four years out before we see the start of another true bull market.

Socialism in many forms may stave off outright depression, but the recovery is going to take a long, long time. Let me add this, the U.S. had better get it's head out of it's ass on monetary policy (cut spending vs. indirect inflation tax on citizens) and an energy independence policy where we allow a new investment opportunity back into America that creates millions of jobs. This increases our odds of avoiding depression rather then 1970's style economy.

[ETFnerd]

"The easy credit led economy which fueled our GDP in 2003-2007 created massive unsustainable public and private debts. The public debt serviced by foreigners is shrinking meaning investor confidence in the U.S. financial system has been temporarily destroyed. Between inflation caused by currency devaluation, wealth destruction in real-estate, energy consumption costing consumer 25% of monthly disposable income (I didn't include food), offshoring and lack of job creation (rather permanent skilled job destruction) the total net loss calculation was 8 Trillion dollars of wealth destroyed in a four year cumulative period."

www.federalreserve.gov...

Is your calculator broken? See FED flow of funds as of March 6, 2008. See the last page 116. It shows US net worth going from $44.1 trillion on 2003 to $57.7 trillion in 2007. A net GAIN of $13.6 trillion! That's an entire year of US GDP. 2008 may show a decrease in net worth.

Tell the truth...you didn't really do any research, did you?

[linenoise]

research? His "website" is a schill site for diploma mills.

[RichardSchweitzer]

AXP does it all - and - everybody pays to play

[greencapitalist]

yeah right...

just got my 2nd ma card. already have 1 ma card + 1 v card.

making money shorting/longing both ma and v.

yeah right.. the world is going to end..let's short ma and v.

oh no...they are awesome companies..let's buy ma and v.

ma a solid international play with 1.2 billion in revenues this qtr. v a solid homestate player with 1.45 billion in revenues.

both of these billon guys is going to dust...oh oh...let's short them....

ps: the presence of dollar and the stupid coins make my blood boil. how ever can i use dollar/coins to buy things....

[WaltMorre]

You see people piling on the credit card debt in the mall all the time, buying things on impulse rather than holding the patience to watch bargain websites (like Unodeals - my favourite) to give themselves the opportuinity to buy the same thing at less than half price.

[Plantinseeds]

Well that song is getting old that MA or V assume no credit risk.
Has anyone ever read their entire prospectus? The risk is that if the issuing bank fails then V or MA have to cover the debt. Now they state that the coverage is only 45% of the original debt.
Ahh the next thing that will be said is that a bank failure is highly unlikely lol.


V Winner's blog is a good one for those that see only one side to visa. Visa, like any other investment vehicle has risk. Especialy nowadays. But it is a good site for info on visa.

[FuzzyPop]

"If the issuing bank fails"? Won't Uncle Ben and his boys be there with a safety net each time?

[twhite113]

If banks, or the federal government for that matter, have to sustain higher losses on creditcard defaults, they will inevitably have to pass some of that on to MA and V in some form or another (i.e. lower transaction fees) and/or they will issue cards with higher interest rates, or even require fees to the consumer for their use. Any of that will be a detriment to V and MA's profitablity. Then there is the fact that consumer spending will likely contract with gas prices going ever higher.

disclosure: short V

[texasgolfer]

is this Moody's report before or after the computer glitch?

[greencapitalist]

v is at 78, closer to last time when i sold a bunch. i got in today at 78 again a little bit.

if the pull back continues (and it is a 'if' depending on dow), it can go 75 and even at 75 v is EXPENSIVE compared to ma.

note that ma has the hyper europe under its belt but v is fully hinged to america market.

but v is a superstar player no doubt. average in at 78. wait for pull back to 75 and average in again. i dont think it is ever going below 75.

as far as ma, it is STILL CHEAP compared to v at 75 to 78.

[greencapitalist]

did you get in at v at 76. that was a nice entry again.

i think v's range might be 76 to 78 for a while. or little bit onto 79. the new 76 to 78 is the old 82 to 84.

ma's investor conference is on may 29. they will be raising guidance based on their strong europe/asia/middle-eas... growth.

ma is DIRT CHEAP even at this level. buy now. dont end up chasing it at 300's.

lot of stocks have come back nicely. some of them are IPI, RIMM, AAPL, GOOG, MA, V(little bit), etc.

don't wait. average down. these are great companies with super management (of course V is still unproven though with new wamu guys!!!!).

don't end up chasing the market. when market gives a gift take it.

[In myimaginaryworld]

I love negative news days, especially a few in a row, when the markets subsequently take a dive and all of the doomsday profits come out of their dark holes to spout off crackpot disaster theories and magical formulaic computations they think support their hysteria. I believe in the overall strength of our new global economy and am investing in the future and trying not to panic every time the markets ebb or somebody writes an article or has a press conference about all of the current problems.

[TouchStoneInvestments]

I have to chuckle when I read some of the negative commentary on visa & Ma. It is crystal clear to me that the largest segment of so called analysts and reader commentary are totally range bound in their assessment and overall thinking. What they fail to admit to and/or recognize is that the business models of V/Ma have left the U.S. problems virtually in the dust due to their worldwide operating platforms. I'm sorry if this hurts their feelings, but it is time they learned that the U.S. is not the biggest dog on the porch, and companies of this breadth are not going to run screaming into the night because U.S politicians use their positions as opportunities to grab a nap and play golf. I understand the frustration of the average investor and everyday worker, but that has little effect on world class companies doing business internationally with their bottom line in tact and growing at astounding rates as their red headed step child (the US) is being taken to the wood shed for a lessen in how to conduct business. Frankly most analysts can't write an article that isn't based on hidden agenda.....as a matter of fact Moodys isn't the first agency to come close to losing it's rating and it won't be the last! So before you listen to anyone shouting about things that go bump in the night and what will happen if..... have a hard look at the size of the playground your company frequents and relax and enjoy. Chances are very good that the fear mongering has some shorts attached to the rumours and don't you just love to watch them scramble for cover?

[buyforeclosures]

Hey Johnny Psuedo.... They changed BK laws buddy...you will be held liable for those credit cards

[greencapitalist]

hey v winner,
your blog is very one sided. nothing wrong in that since you are v passion guy.

i too hold v and averaged in again at 76.2 today. i think it can fall further as it adjusts to its correct valuation.

v is a strong buy. but as i have been telling (check my other ma/v threads in the places we used to post) that at 85/89 (and 100 as per you by summer!!!!), v is getting bubbly.

i still stand by this statement i made 2 weeks back. either ma is DEAD CHEAP or v is a BUBBLE.

ma did not fly from 39 to 275 in 2 months. it took several years, multiple beatings, severe plunges, test/retesting of several lows, etc.

v has to do that. i think if dow goes down more v will come to present ma valuation which is closer to 70.

ma investor conference is on may 29 - sev.prnewswire.com/ban...

they should be raising guidance. look for numbers they are giving especially international (europe, china, middleeast is 3 specific areas) and if they are giving higher numbers, i think that is a good +ve for v.

v's next qtr is very important as markets wont accept 5 cents kind of beat. it needs smashing beat. you know what, if ma beats by 15 cents it is considered a miss!!!

i would again urge caution on v as it rocketed from 71 to 89 for no reason. now it is coming again down. it is testing 75 and it will be interesting to see how it goes.

as for your blog, a nice smart sexy lady. that's all. it has no brains i am afraid, since the other view (cautious view) is totally blocked out.

and hey please don't abuse me for posting the truth :-)

[Wez]

V winner is the most ridiculous stock touting boiler room promoter I've seen on these boards. Makes me feel like I'm on the Yahoo boards. Anybody with a clear thought as to what risks a company poses is instantly classified a basher.

[dfax]

Hey Greencap- I like your common sense approach to buying V but it didn't take Mastercard "several years" to go from 39 to 275 as you stated. Two years ago, MA was trading in the $45 range and as recent as March, 2007 the price was at $106. You could say that its rise to $275 took place in a little over one year! BUt as far as V goes, I agree with you that it's a bit optimistic to expect $100 by June

[greencapitalist]

>>>I like your common sense approach to buying V but it didn't take Mastercard "several years" to go from 39 to 275 as you stated.

my apologies. it should read several quarters.

watch out on may 29. they are sure to raise guidance. they are ramping up big time on margins, they are ramping up on paywave technology, they are going big time on prepaid cards, they are focussing less on america and more on international growth markets, management team is superb.

with 12 bucks per share and a valuation of 40 times (assuming stock market becomes normal again) it should trade close to 500 bucks in 2010. even if stock market is rockey, they should cross 400 in 2010 in worst of worst cases.

last earnings it was 190 and went to 240 and then now 275. last july earnings was a huge beat. close to 60 to 80 cents beat due to summer spending. this qtr they should do the same. stock is very undervalued. if they beat anything more than 40 cents per share, it should trade close to 350. i am loading more at 270's.

v also all the above except that they have to prove it. 7 cents, 5 cents of beat means the stock is fully valued at present levels and also the stock float is big. a stock repurchase can help, but seeing v having several things to tackle (legal, margins, new management, etc) stock repurchase will be the last thing they will be doing.

we will see. may 29 might be very interesting to listen to ma management. don't know whether v has lined up anything like this.

[Plantinseeds]

I'm sorry to say that I think you may just be right Wez.

Vwinner is getting more and more agressive about telling people they are stupid if they think Visa may have some risk. Or if they think Visa may sit at this mid $70's posistion for a bit.

Why would anyone get so angry with people for stating their opinions? Espescially when theres (us stupid ones) are getting it right on where visa will be and when.

Johnathan, you yourself stated back on the visa article that had like 135 comments that you were buying on the dips and selling high, even though you carried stock in a long posistion. Now you are telling people they are fools if they think V will drop to the $70's.
You are telling me that I am stupid cause I have an opinion that differs from yours or that I post something that isn't rah rah rah go visa even though my tiny 525 shares will be held for 17 years!
Unless V goes to $62.70 where I got in I ain't sellin.
Please don't call me stupid anymore just because I have a different opinion and you booted me off your blog cause in your words "you post like you were on SA or yahoo finance".

In His Mercy

[investmentAction]

cool of guys... we are here to make money, not to fight :-)

[greencapitalist]

hey v winner, for once you are mildly abusive. that's an improvement :-)

in this crazy world of man eat man, being autistic is definitely much benign than 'normal' :-)

ok. let's step back. let's see what market does to both ma and v.

remember fslr has record short interest right from the day it crossed 50 bucks. that stock has repeatedly eaten and chewed up shorts. ma having shorts is not a big deal so does many tech stocks. a stock value is not determined by shorts but by the company's performance.

i still stand by my statement. when you value a stock, it should not come from emotion. but from valuation. even v at 77, ma either DEAD CHEAP or v a BUBBLE.

remember ma has 45% europe (that is entire europe). this figure is projected to grow big into 60% as ma moves aggressively. with v europe a seperate entity, v is cut out from a very rapidly expanding market. as per the information i see, v is gasping to catch up with ma in the biggest growing market (europe) in money/transaction terms.

ma is pushing big time in india/dubai/china and to imagine that v is a leader in these area is just that. an imagination. ma and v are running neck to neck in several emerging markets.

that's why you have ma at 1.2 billion and v (without europe) at 1.45 billion in this qtr revenue. v is america leader but with this market fully saturated, v stock already priced in.

so it all depends on how v and ma perform outside america.

watch out for ma conf call on may 29. they are going to raise guidance and their europe, india, chian, dubai, etc kind of stories is on the upswing (that's why you saw a 59 cents beat this qtr).

i will be buying v more but it has to come to 70 closer to ma's valuation. or else i will be happy averaging ma as market has to give ma v's valuation very soon.

till conference call of ma, amen.

[greencapitalist]

hey v winner, for once you are mildly abusive. that's an improvement :-)

in this crazy world of man eat man, being autistic is definitely much benign than 'normal' :-)

ok. let's step back. let's see what market does to both ma and v.

remember fslr has record short interest right from the day it crossed 50 bucks. that stock has repeatedly eaten and chewed up shorts. ma having shorts is not a big deal so does many tech stocks. a stock value is not determined by shorts but by the company's performance.

i still stand by my statement. when you value a stock, it should not come from emotion. but from valuation. even v at 77, ma either DEAD CHEAP or v a BUBBLE.

remember ma has 45% europe (that is entire europe). this figure is projected to grow big into 60% as ma moves aggressively. with v europe a seperate entity, v is cut out from a very rapidly expanding market. as per the information i see, v is gasping to catch up with ma in the biggest growing market (europe) in money/transaction terms.

ma is pushing big time in india/dubai/china and to imagine that v is a leader in these area is just that. an imagination. ma and v are running neck to neck in several emerging markets.

that's why you have ma at 1.2 billion and v (without europe) at 1.45 billion in this qtr revenue. v is america leader but with this market fully saturated, v stock already priced in.

so it all depends on how v and ma perform outside america.

watch out for ma conf call on may 29. they are going to raise guidance and their europe, india, chian, dubai, etc kind of stories is on the upswing (that's why you saw a 59 cents beat this qtr).

i will be buying v more but it has to come to 70 closer to ma's valuation. or else i will be happy averaging ma as market has to give ma v's valuation very soon.

till conference call of ma, amen.

[greencapitalist]

hey v winner, for once you are mildly abusive. that's an improvement :-)

in this crazy world of man eat man, being autistic is definitely much benign than 'normal' :-)

ok. let's step back. let's see what market does to both ma and v.

remember fslr has record short interest right from the day it crossed 50 bucks. that stock has repeatedly eaten and chewed up shorts. ma having shorts is not a big deal so does many tech stocks. a stock value is not determined by shorts but by the company's performance.

i still stand by my statement. when you value a stock, it should not come from emotion. but from valuation. even v at 77, ma either DEAD CHEAP or v a BUBBLE.

remember ma has 45% europe (that is entire europe). this figure is projected to grow big into 60% as ma moves aggressively. with v europe a seperate entity, v is cut out from a very rapidly expanding market. as per the information i see, v is gasping to catch up with ma in the biggest growing market (europe) in money/transaction terms.

ma is pushing big time in india/dubai/china and to imagine that v is a leader in these area is just that. an imagination. ma and v are running neck to neck in several emerging markets.

that's why you have ma at 1.2 billion and v (without europe) at 1.45 billion in this qtr revenue. v is america leader but with this market fully saturated, v stock already priced in.

so it all depends on how v and ma perform outside america.

watch out for ma conf call on may 29. they are going to raise guidance and their europe, india, chian, dubai, etc kind of stories is on the upswing (that's why you saw a 59 cents beat this qtr).

i will be buying v more but it has to come to 70 closer to ma's valuation. or else i will be happy averaging ma as market has to give ma v's valuation very soon.

till conference call of ma, amen.

[greencapitalist]

hey v winner, for once you are mildly abusive. that's an improvement :-)

in this crazy world of man eat man, being autistic is definitely much benign than 'normal' :-)

ok. let's step back. let's see what market does to both ma and v.

remember fslr has record short interest right from the day it crossed 50 bucks. that stock has repeatedly eaten and chewed up shorts. ma having shorts is not a big deal so does many tech stocks. a stock value is not determined by shorts but by the company's performance.

i still stand by my statement. when you value a stock, it should not come from emotion. but from valuation. even v at 77, ma either DEAD CHEAP or v a BUBBLE.

remember ma has 45% europe (that is entire europe). this figure is projected to grow big into 60% as ma moves aggressively. with v europe a seperate entity, v is cut out from a very rapidly expanding market. as per the information i see, v is gasping to catch up with ma in the biggest growing market (europe) in money/transaction terms.

ma is pushing big time in india/dubai/china and to imagine that v is a leader in these area is just that. an imagination. ma and v are running neck to neck in several emerging markets.

that's why you have ma at 1.2 billion and v (without europe) at 1.45 billion in this qtr revenue. v is america leader but with this market fully saturated, v stock already priced in.

so it all depends on how v and ma perform outside america.

watch out for ma conf call on may 29. they are going to raise guidance and their europe, india, chian, dubai, etc kind of stories is on the upswing (that's why you saw a 59 cents beat this qtr).

i will be buying v more but it has to come to 70 closer to ma's valuation. or else i will be happy averaging ma as market has to give ma v's valuation very soon.

till conference call of ma, amen.

[greencapitalist]

apologies for the repeat post. i was not able to login while posting but my post went through. apologies again.

[Plantinseeds]

Wow I've been called many things in my life but freak isn't one of them.

Lol what you told me as that I was not loyal to the team for posting "balanced posts" instead of ra ra rah and cause I was posting like SA or Yahoo finance. I still have the e-mails should I print them here?

Again Johnathan you are trying to make yourself the important one at others expense. By your own posts on here you are just like the rest of the investors here ( except for your over promoting and clueless on how to make friends and influence people ).

This is an investors blog, you have your own personal blog now, why are you continully coming here?

By your own posts here, people can make there minds up for themselfs for who you really are.

I will not argue with you anymore. I will however pray for you.

In His Mercy

[Plantinseeds]

IMHO Visa will not be able to move up much if the market as a whole continues to nose dive. In fact it will follow right along with the market until conference call.

In His Mercy

[Plantinseeds]

I hope cat or others did not give Vwinner (Johnathan) any personal info.

I too have sent the FBI the e-mails in which he sent me.

Kzonck let me know if you need a copy of my emails from him.