The mortgage crisis may not be a thing of the past but at least steps are already being taken to address the problem. But while that is being done, yet another seemingly smaller in value but equally serious financial catastrophe looms ahead: credit card debt. Yes, the numbers were bad in 2008, but financial analysts are forewarning of an even worse 2009.

The Staggering Facts

The figures are simply overwhelming. In 2008 alone, credit card debt in the US reached a whooping $950 billion, about $41 billion of which has been pegged off as bad debt. Of the $76 billion credit card incurred in that year alone, $46 billion is shared by the top three leading card issuers: Bank of America®, JP Chase Morgan, and Citigroup.

A general rule of thumb used in calculating possible credit card defaults is to add 1% to the unemployment rate. Deducing from the rising unemployment in the country which reached a 25-year peak in February 2009 at 8.1%, the total charge-offs could climb to more than 9%, possibly peaking at 10%.

That said, the credit card debt expected to rise further to just under a trillion this year and a whooping $96 million is expected to turn toxic.

Why Consumers are Defaulting

Consumer problems sound all too familiar. Massive layoffs, tough economic times, lack of health insurance – all these factors have made many Americans reach out for their only source of liquidity at this point in their lives: the plastic card. Even daily necessities as food and gasoline, and worse, mortgage payments, have been charged to the credit card.

Making things even more difficult for the average American, many banks are not helping things any. A report from the consumer advocacy group Consumer Action recently revealed that 37% of banks have hiked up their interest rates across the board.

Even the most religious of payers or those who were late for a day or two were slapped with new interest rates anywhere from 21% to just under 30%. That’s from a low of about 8% to 15%. With the way things are going, those who can only afford to pay the minimum may end up going nowhere with their credit card debt… unless they decide to just simply default on it.

How Banks are Dealing with the Crisis

The big banks however, have stated that they are not unprepared for the storm. In managing the potential risks, banks and credit card companies have tightened their lending standards, reduced credit limits for some cardholders, closed some accounts altogether, and arranged for various payment programs.

Some credit card issuers have even come up with attractive incentives to have more consumers either pay up or significantly reduce their balances. Bank of America® is offering to pay $300 each to a select group of costumers if they pay off their outstanding debts and close their accounts. Citigroup and CompuCredit on the other hand, are promising some credit to decrease the debt of cardholders who will pay a specific percentage above the minimum amount required.

While the intention behind these offers is to collect as much as possible from risky cardholders, banks may have disregarded the fact that those who are unable to pay even just more than the required minimum in the first place, are those who may be in dire financial straits and are least likely able to afford to pay in full. And so the vicious cycle goes on.

A  , Vicious Cycle

Many banks attempt to downplay the credit card crisis as one being on a much lower scale than the trillions at stake in the subprime mortgage crisis. And this is true as far as the enormity of the amount is concerned. What financial analysts are quick to point out however, is that unlike the defaulted mortgage where a bank can still hope to sell off a property even at a loss and recover part of the loan, majority of credit card debt is completely unsecured.

The federal government is continually emphasizing the need to get credit moving again and yet faced with all these, it is a wonder how banks can start doing just that. Perhaps the more pressing question is whether the credit card situation will merit another round of bailouts for banks. If so, when will it all end?

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