Predicting how many Americans will have problems in paying their credit card bills used to be easy. The banks simply look at the unemployment rate to gauge the level of risk they need to face in the near future. This isn’t accurate anymore. Previously, job loss meant inability to pay. Nowadays, losses are outpacing the unemployment rate.

Economic experts projects that millions of Americans will have trouble paying off their obligations, leaving the already vulnerable banks hanging by a thread. Small and large-scale financial institutions are still recovering from the housing bust. Credit card problems might worsen their condition unless precautions are taken immediately.

Worst Case Scenario

The stress test results which were released last May 7, suggested that the nation’s leading banks should expect $82.4 billion in credit card losses if the “worst case” scenario occurs. The said losses will be felt at the end of 2010. But this might still not be the “worst” scenario banks may need to deal with. This is because if the unemployment rate exceeds 10 percent, the number of uncollectible loans will also follow.

Both Capital One Financial and American Express expect 20 percent of their credit card loans to go bad this year alone. The expected loss is higher at the Bank of America®, JP Morgan Chase, and Citigroup where uncollectible loans are estimated to be at 23 percent.

As if the government’s grim forecast wasn’t bad enough, the estimates of Oliver Wyman expects card losses to go as high as $141.5 billion if the regulators’ loss rate is used on the credit card business. It can reach $186 billion if it is applied to the entire industry.

The official projection of $82.4 billion does not also reflect another important factor in the industry. Billions of dollars worth of credit card losses were tied into bonds and are not reflected in the balance sheet. Certain portions of these losses will be shouldered by external investors, however.

Expected Write-Offs

In 2008, banks wrote off 5.5 percent of their credit card balances on the average with the unemployment rate at 5.8 percent. Experts predict the credit card write-offs may far surpass the jobless rate because the problem is compounded by the housing market bust and lack of consumer confidence. Also, take note that in past recessions, cardholders who got laid-off were able to get equity from their homes to pay off their credit card debts. Now, there is no such option.

Credit card companies are now bracing for the worst. Losses are spiraling and at the same time, lawmakers are trying to pass a set of tough consumer protection programs that might leave a devastating effect on the industry.

For the banks, the situation is looking bleak. As the economic recession drags on, cardholders are cutting back on spending. Customers with good credit history are rare and some of their troubled borrowers are so deep in debt that creditors have no choice but to reduce their card balances.

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