credit defaults are up dramatically, at the highest rate in six years.
The net charge-off rate on credit-card defaults could skyrocket to 10% in 2009 — double the average of 5% over the past 10 years — reaching $18.6 billion in the first quarter and $96 billion by the end of next year, predicts an October report from Innovest Strategic Value Advisors, an investment-research firm.
Traditionally, the credit-card industry is resilient during economic downturns because of its pricing flexibility. As the economy slows and people start to become late on their payments, card companies can boost earnings through late fees and higher interest rates. Today, however, consumers are tapped out and defaults are ratcheting up.
Citigroup's credit-card division lost $902 million in the third quarter.
Over the past decade, U.S. households have been loading up on debt, with credit-card balances rising 75% since 1999. Yet families' real wages have increased only slightly — by just 4% during that same time period, according to Innovest. The savings rate has similarly declined relative to credit-card balances. Meanwhile, home equity, the biggest source of wealth for most families, has been drained by the mortgage crisis.
Securitization:
Increased use of securitization in the credit-card industry has fueled some if its growth. Over the past four years, seven of the biggest card issuers packaged more debt into securities, which they sold to investors, according to USA Today's assessment of banking records.
"The securitization market for credit cards was operating for the first half of 2008 but is now shut down, making it harder to securitize credit-card debt," says Arthur Wilmarth, finance professor at George Washington University Law School. Banks
Compare to mortage-mess?
Even if credit-card defaults reach a record high of 10% of the $970 billion in revolving debt, a chunk of that total will get paid off in full every month, which would result in an aggregate default of less than $100 billion. That number doesn't come near the losses that have occurred in the $14 trillion U.S. mortgage market. Moreover, credit card asset-backed securities aren't as far-reaching or as complex as mortgage asset-backed securities, and they don't have large amounts of credit-default swaps piled on top of them like mortgages do. As a result, a total collapse of the credit-card industry wouldn't have the same far-reaching ramifications.
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