High Credit Card Default Rates—A Big Factor in APR and Fee Hikes

July 22, 2009, Written By Sarah Hefner

A look at the default statistics released last week by credit card issuers helps explain why consumers are seeing interest rate hikes and decreases in their credit limits.

Bank of America, the largest bank in the country, reported that its default rate jumped to 13.8% in June from 12.5% in May. Defaults, or charge-offs, are the debts that a lender believes it will never collect.

Experts explain that the biggest bank in America does not expect to collect on almost 14% of its credit card loans, which is a tremendous loss and helps explain why Bank of America is raising rates, increasing balance transfer fees, and switching from fixed to variable rates on a number of their credit cards.

Default rates and charge-offs are still weighing down the credit card industry, costing banks billions of dollars. The default rate is expected to grow as the unemployment rate increases.

Experts go on to explain that both the credit card industry and cardholders have been hurt by the actions of others, comparable to a couple going through a divorce. In this case, cardholders are hurt by the interest rate and fee increases, and the changes made by issuers who are losing billions of dollars in unpaid credit card loans. Financial experts suggest that it may be impossible to expect a reconciliation in the near future where both parties are happy with each other.

Last week, banks and issuers released their monthly reports that included default rates. For some issuers, default rates remained about the same. While this could be seen as a sign of stabilization, it could also be a short pause as households used tax refunds to pay down credit card balances. Default rates from other major credit card issuers are listed below:

* Capital One’s rate rose to 9.73% in June from 9.41% in May.

* JP Morgan Chase defaults declined to 8.04% in June from 8.36% in May.

* Discover’s rate fell to 8.75% from 8.91%.

* American Express defaults fell slightly from 10.0% in May to 9.9% in June.

* Citigroup defaults remained unchanged at 10.5%

Since the unemployment rate is expected to increase, some observers fear that industry’s default rate could climb above 12% by the first quarter of 2010.


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The information contained within this article was accurate as of July 22, 2009. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.


About Sarah Hefner

Sarah Hefner has written for several publications as well as serving as an editor to various writers. She graduated from the School of Communications & Journalism at Auburn University with a Bachelor of Arts degree in Public Relations.
View all posts by Sarah Hefner