Here Comes the Credit Card Crisis

For months, it has been expected that credit cards will be the next shoe to drop in the financial crisis after mortgages. It seems that the prediction is coming true.

Credit card companies are reporting spikes in delinquencies and are circling their wagons by setting aside more money to cushion losses and are paying the price on their balance sheets. A frightening new twist is that layoffs are increasing with 70,000 new layoffs announced in just the past few days. Wishful thinking that unemployment would peak at 8 or 8.5 percent this year now seems dreamy.

The American Banker reports that credit card losses are now seen as surpassing the levels of the previous two recessions of 2001 and 1991.

A few examples:

• Credit card bellwether Capital One Financial, one of the nation’s largest issuers of Master Card and Visa charge cards, reported that card charge-offs increased from 6.13 percent in the third quarter to 7.08 percent in the fourth quarter. CapOne now expects loan losses from cards to rise to 8.1 percent this year just after losing $1.4 billion in the last quarter.
• American Express reported fairly dismal earnings this week with fourth quarter income down 79.3 percent to $172 million. Credit cards were largely to blame for the woes and the net loan write off rate had increased to 6.7 percent compared with 5.9 percent in the third quarter last year and 3.4 percent the year before.
• Citigroup, which is on the cusp of a major reorganization, saw its credit card chargeoff rate (for its own cards as opposed to private label ones it handles for other firms) surpass the peak of 6.44 percent in the past recession.

The grim outlook for credit cards makes the subprime mess seem oh-so-yesterday. One reason is that the full extent of the economic downturn has hit many industrial sectors besides real estate. New layoff announcements include Caterpillar, Volvo, Best Buy and Target. Unemployment has increased in every state and the District of Columbia.

Indeed, unemployment is sweeping the country like a swarm of locusts forcing bank executives to rethink their predictions. For example, Bank of America CEO Kenneth Lewis predicted last summer that chargeoffs would start to slow by the end of last year with improvement by now, which has hardly been the case.

Revisions are the order of the day. JPMorgan Chase, which bought bankrupt Washington Mutual last year, now predicts that its chargeoff rate will go from 7 percent to 8 percent later this year — bunmping its previous predicts by a percentage point each.

To combat the negative trends, credit card companies are continuing to dun their customers with lower lines of credit and other punitive measures even if they have solid credit and records of repaying on time. And they will need to amass more funds to cover losses.

If there’s any short-term light at the end of the tunnel, it could come if Barack Obama’s nearly $900 billion stimulus package is approved and funds start flowing to infrastructure rebuilding, education and tax breaks for business.

That clump you hear is the other shoe dropping.