Credit Card Defaults at Record Levels

After months of new records in home foreclosures, credit cards defaults are quickly becoming the next shoe to drop in this financial crisis. New numbers released for the month of May show record defaults after Bank Of America announced that their default rate is up to 12.5%, a full 2% higher than it was just a month earlier. A default rate is the percentage of outstanding debt that a bank does not expect to be able to collect on. Bank of America is telling us that roughly 1/8 of the money they have loaned to consumers via credit cards-a staggering number–will not be repaid.

During the same month, American Express increased their default rate from 9.9% in April to 10.4% in May. American Express accounts for about a quarter of all the credit card purchases made in the U.S., so we are once again talking about billions of dollars in debt being uncollectable. Many of their customers are in California and Florida, two states with disastrous housing markets and massive unemployment.

If the default rate for the industry exceeds 10%, we will be talking about over $70 billion in unsecured debt written off by financial institutions. Many analysts expect that the overall default rate will exceed 10% before the end of 2009.

Not all the news was bad from major credit card issuers. JP Morgan Chase reported the smallest increase in default rates, jumping modestly from 8.07% in April to 8.36% in May. Credit card delinquencies actually fell during the month of May, a factor that most experts attribute to people using their tax returns to pay down debt and not a sustainable trend.

Credit card companies have worked to limit their losses over the past several months by cutting award programs, boosting rates and fees, and closing customer accounts. These practices may have helped reduce losses so far, but they are soon to end as legislation has passed to regulate the measures card companies are allowed to take in changing terms for existing cardholders.

The industry is paying a heavy price for giving credit so freely for so many years. They can take measures now to reduce the losses a little, but they can’t do much to stop the tidal wave of losses that are still to come.

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