Rising Defaults on Credit Card Bills

by: Barry Ritholtz

This can't be good:

"US consumers are defaulting on credit card payments at a significantly higher rate than last year, raising the prospect of problems in the stricken US subprime mortgage market spreading to other types of consumer debt.

Credit card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate - a measure of cardholders' willingness and ability to repay their debt - fell for the first time in more than four years."

I suspect that there is a big swath of folks who can no longer refi their homes . . . So after their rates reset 300 bips or so, they take cash advances to pay the mortgage -- then default on the Credit card debt, rather than the mortgage.

However, as FT notes:

"But it is not clear that the borrowers defaulting on their credit cards are the same people defaulting on their subprime mortgages, it added. This is in part because underwriting standards in the credit card sector have been more robust than in the mortgage industry.Also, many highly leveraged subprime borrowers, with little or no equity in their homes, may choose to default on a mortgage before losing their credit cards."

(I have been meaning to get to this issue for some time. Let me see if I can dig up a chart on this to put it into some perspective . . .)

One other thing:

"Recent increases in credit card losses can in part be ascribed to a steady rise in personal bankruptcy filings since 2005. According to the Administrative Office of the US Courts, quarterly non-business bankruptcy filings have been rising since the first quarter of 2006.

Scott Hoyt, economist at Moody's Economy.com said: "Consumer credit quality will continue to deteriorate as debt burdens and financial obligations rise, house prices continue to fall, credit standards are tightened, labour markets loosen modestly and gasoline and other energy prices remain high."

The Chicago Tribune adds:

"Now that the easy money in home mortgages is all but over, consumers may soon be caught in a financial squeeze with their credit cards.

That's the worry among some economists and credit counselors as home lending has shifted abruptly into low gear this summer. That leaves homeowners owing big sums to Visa or MasterCard without an important escape hatch -- the ability to pay down the plastic by dashing off a check from their home equity line of credit or rolling the debt into a new, bigger mortgage.

"You're not going to be able to get that mortgage loan. You'll be stuck with the higher interest credit card debt," warns Carl Steidtmann, chief economist with Deloitte Research. "We will have to live within our means. I know it's a troubling phenomenon. But we're not going to be able to spend at levels well above our income levels."

This is worth watching, as it can reveals the degree of actual financial stress the consumer is under . . .


Defaults on credit card bills in US rising
Saskia Scholtes
FT, August 28 2007 03:00

The next credit crunch?
As home loan market tightens, mounting credit card debt could spur new crisis
Susan Chandler
Chicago Tribune, August 26, 2007