Credit Card Delinquencies on the Rise

Credit card delinquencies are on the rise, as the economy is in shambles and unemployment is rising above 8%.
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The economy is in shambles and unemployment is rising above 8%. It should come as no surprise that delinquencies are rising at the major credit card issuers.

Card companies are required to file monthly reports with the

Securities and Exchange Commission

regarding performance data of credit card loans that have been securitized. Analysts say the performance data gives a useful indication of how a company's entire credit card portfolio is doing.

Companies including

American Express

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Discover Financial

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Capital One

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, as well as banks with large credit card arms such as

Bank of America

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JPMorgan Chase

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, reported monthly metrics earlier this week.


said Thursday it made $120 million, or 25 cents a share, in the first quarter, compared to $81.2 million, or 17 cents a share, in the year-earlier period. Discover also cut its dividend by two-thirds to 2 cents a share. The action will save the company $80 million in capital a year, it said.

Last month credit card losses "increased by an average of 14% sequentially and 56% year-over-year" for the three largest banks -- BofA, Citi and JPMorgan Chase, according to Jeff Harte, an analyst at Sandler O'Neill & Partners. Harte cautions that the securitized portfolio data tends to be "volatile from month-to-month."

Citi had the highest amount of charged-off loans at 9.33% of the securitized portfolio vs. 6.95% in January. BofA's charge-offs totaled 9.1%, while JPMorgan Chase's charge offs came in at 6.43%.

On the other hand, BofA had the highest delinquencies last month, at 7.81%. Citi's reported delinquencies were 5.6% and JPMorgan Chase's were 4.64%.

While JPMorgan Chase's credit metrics met the Sandler analyst's expectations, the losses within BofA and Citi's portfolios have "ramped up at a faster pace than we anticipated in February," Harte writes in a note this week.

"This has been going on for more than a year and completely expected -- not that it's ever welcome," says David Robertson, publisher of

The Nilson Report

, a newsletter for the payments industry. "There are no surprises here. There is always the awareness that when unemployment is rising as it is in the United States that you're going to have a concurrent problem with charge offs."

But what makes collecting payments on defaulted credit card loans particularly difficult is that consumers tend to "put other debt ahead of credit card debt," Robertson adds.

These days, the problem is exacerbated by the fact that consumers on average have more than five general purpose credit cards, where maybe only one of the issuers gets paid, he says.

"Until this stops you just have a greater build up of charged-off debt ... that can't even be collected as long as people are not back to work," Robertson says. "The credit card

industry is completely hostage to rising unemployment."

Goldman Sachs analysts expect charge-offs in the credit card industry to reach a high of 9% to 10% this credit cycle, but could be higher at select firms, like American Express.

The analysts say that American Express has a higher exposure to credit card loans made at the height of the bubble that are "performing much worse." AmEx also has higher exposure to customers located in geographies that have been hurt most by the housing bubble.

American Express had the second highest charge-off rate at 9.31% in February, up 102 basis points from the prior month. Delinquencies in AmEx's securitized portfolio rose 12 basis points to 5.4%.

The New York firm also disclosed monthly data on its U.S. credit card portfolio on a managed basis for the first time. The filing said that charge-offs in the $57.8 billion-U.S. card services portfolio totaled 8.6%, compared to 8.1% in January. Loans that were 30 days past due totaled 5.3%, up slightly from the month before of 5.1%.

American Express requires charge card holders to pay their balance in full every month, but during the height of the lending frenzy the firm forayed into cards where customers could keep a revolving balance. American Express is likely regretting its decision now.

The company is trying to salvage its troubled portfolio by offering particularly high-risk cardholders a $300 prepaid card for those who pay their balances off in full by the end of April, according to

The Nilson Report


Standard & Poor's on Thursday placed American Express on credit watch with negative implications, due to the deepening recession, the ratings agency said.

The action reflects the firm's "escalating credit quality deterioration within the context of what we believe will be continuing macroeconomic weakness and pressures on the consumer," S&P said.

At the height of the credit boom, card companies and other lenders relaxed their loan standards in order to gain customers. The firms were able to appeal to customers by charging low introductory rates and offering promotional services and the occasional free T-shirt to new customers. But like the home-buying frenzy in which many homeowners should not have qualified for mortgages under normal circumstances, there is also an abundance of cardholders that shouldn't have received credit cards or at least ones with very high limits.

In light of the economic downturn, credit card firms are struggling to minimize the losses that their businesses are increasingly taking, as consumers become overwhelmed with their debt.

As the banks try to stem the tide of rising losses in the residential real estate and securities business, those with large credit card exposures are using all avenues available to them to manage their credit card losses. Many are cutting credit lines, raising interest rates, closing accounts that haven't been used in some time, and reigning in marketing of low-interest rate and other promotional cards to borrowers.

Firms are ramping up their collection services and how they use the data to figure out whether they should attempt collecting on a loan or just cut their losses, says Celent analyst Bart Narter.

In an op-ed piece in the

Wall Street Journal

last week, bearish analyst Meredith Whitney estimates that more than $2 trillion of credit card lines will be cut this year, rising to $2.7 trillion in 2010.

She says that while credit was extended "too freely" over the past 15 years, "taking credit away from people who have the ability to pay their bills" will suffer negative consequences. Whitney cited that there is roughly $5 trillion of credit lines in the United States, with more than $800 million currently drawn upon.

"If credit is taken away from what otherwise is an able borrower, the borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively."

Michael Pento, chief economist at Delta Global Advisors, says the rising delinquencies on credit cards is the "natural progression" that began with the subprime crisis and has "metasisized" into credit cards, student loans and auto loans.

The level of debt that consumer households are holding is at an all-time high of 96.7% of the country's gross domestic product, while the nation's total debt is 360% of GDP compared to 299% during the Great Depression, Pento says.

"I'm not at all surprised consumers are pulling their horns in," Pento says. "If household debt is at 97% of GDP and total debt is 360% of GDP it's a natural correlation to assume that consumers are tapped out and are no longer willing to take on any more debt."

Despite the dour news, a glimmer of hope could be in waiting at several card firms. So-called early stage delinquencies, which are classified as payments that are one to three months late, declined at American Express month over month, and were virtually unchanged at Citi and JPMorgan Chase.