Credit Card Delinquencies on the Rise
Credit card delinquencies are a growing problem for credit card issuers and as a result, issuers are making changes.
Several issuers recently reported that charge-off rates are now exceeding 7%. Since credit card delinquencies are indirectly tied to unemployment, and unemployment numbers continue to rise, analysts are predicting that the charge-off rate could increase to as much as 9%-10%. Charge-offs are bad for both the issuer and the cardholder.
* According to data compiled by Bloomberg, the average charge-off rate, reflecting loans the banks don’t expect to be repaid, was 7.1% in January, compared with 4.6% a year earlier.
* In January, American Express reported that the annual net charge-off rate (a measure of credit default) rose to 8.29% in January, up from 7.23% in December. The rate for loans at least 30 days delinquent increased to 5.28% from 4.87%.
* Also in January, Capital One’s annual net charge-off rate was 7.87%, up from 7.71% in December. The rate for loans at least 30 days delinquent increased to 5.02% from 4.78%.
* Chase warned that net charge-offs could reach 7% for the first quarter.
* Fitch Ratings anticipates charge-offs will be more than 8% in the coming months and possibly 9% during the second-half of 2009.
To reduce their risk of failed loans, credit card issuers have become cautious lenders. They have tightened lending requirements and require higher credit scores. Some issuers are increasing interest rates, accepting fewer applications, lowering credit limits, and closing inactive accounts. Some are even trying to buy out some or their accounts that are at the highest risk of default.
Charge-offs are failed, non-collectable loans. Since credit card debt is unsecured, issuers don’t have any collateral for the loan. A charge-off is lost money for issuers. Because they are losing billions of dollars in charge-offs, they must make adjustments to pay for these losses and make it a priority to avoid them. Experts offer the reminder that credit card issuers are in the business to make money, and explain the direct relationship between issuers and cardholders: the changes issuers make to save their business affect the cardholders who are going through their own financial struggles; the changes issuers must make to stay in business make it even harder for some cardholders to make their monthly payment.
Charge-offs aren’t only bad for issuers, but they are also bad for cardholders. If you do not pay anything on your credit card balance for several months, the credit card issuer might assume that you do not intend to pay at all and they may charge-off your account. After the account is charged off, the outstanding balance is then classified as a loss. This means the lender has given up hope of collecting on the credit card debt.
A charge-off is not a magic eraser that simply removes the debt, and it certainly does not free the cardholder from paying the debt. After the charge-off, the loan will likely be turned over to a collection agency. Unless you declare bankruptcy, you will have to pay something for that debt, plus interest and fees. To make the situation worse, charge-offs are devastating to a credit score. It shows that you have a history of not paying your bills, which means that lenders will give you very high interest rates for any future loans that you apply for, whether that be a car loan, a home loan, or even a new credit card. Charge-offs can stay on your credit report for up to seven years.
Financial experts recommend contacting your credit card issuer and working out a payment plan if you fall behind and can’t pay your monthly payment right now. Normally, issuers are much more willing to work with you if you let them know as soon as you are aware of the problem.
If you are suddenly behind on multiple loans, the National Foundation of Credit Counseling can help you with a payment plan.