Americans Falling Behind on Credit Card Payments at Alarming Rate

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Americans Falling Behind on Credit Card Payments at Alarming Rate

Monday, December 24, 2007

SAN FRANCISCO - Americans are falling behind on their credit card payments

at an alarming rate, sending delinquencies and defaults surging by

double-digit percentages in the last year and prompting warnings of worse to

come.

An Associated Press analysis of financial data from the country's largest

card issuers also found that the greatest rise was among accounts more than

90 days in arrears.

Experts say these signs of the deterioration of finances of many households

are partly a byproduct of the subprime mortgage crisis and could spell more

trouble ahead for an already sputtering economy.

"Debt eventually leaks into other areas, whether it starts with the mortgage

and goes to the credit card or vice versa," said Cliff Tan, a visiting

scholar at Stanford University and an expert on credit risk. "We're starting

to see leaks now."

The value of credit card accounts at least 30 days late jumped 26 percent to

$17.3 billion in October from a year earlier at 17 large credit card trusts

examined by the AP. That represented more than 4 percent of the total

outstanding principal balances owed to the trusts on credit cards that were

issued by banks such as Bank of America and Capital One and for retailers

like Home Depot and Wal-Mart.

At the same time, defaults - when lenders essentially give up hope of ever

being repaid and write off the debt - rose 18 percent to almost $961 million

in October, according to filings made by the trusts with the Securities and

Exchange Commission.

Serious delinquencies also are up sharply: Some of the nation's biggest

lenders - including Advanta, GE Money Bank and HSBC - reported increases of

50 percent or more in the value of accounts that were at least 90 days

delinquent when compared with the same period a year ago.

The AP analyzed data representing about 325 million individual accounts held

in trusts that were created by credit card issuers in order to sell the debt

to investors - similar to how many banks packaged and sold subprime mortgage

loans. Together, they represent about 45 percent of the $920 billion the

Federal Reserve counts as credit card debt owed by Americans.

Until recently, credit card default rates had been running close to record

lows, providing one of the few profit growth areas for the nation's banks,

which continue to flood Americans' mailboxes with billions of letters

monthly offering easy sign-ups for new plastic.

Even after the recent spike in bad loans, the credit card business is still

quite lucrative, thanks to interest rates that can run as high as 36

percent, plus late fees and other penalties.

But what is coming into sharper focus from the detailed monthly SEC filings

from the trusts is a snapshot of the worrisome state of Americans' ability

to juggle growing and expensive credit card debt.

The trend carried into November. As of Friday, all of the trusts that filed

reports for the month show increases in both delinquencies and defaults over

November 2006, and many show sequential increases from October.

Discover accounts 30 days or more delinquent jumped 25,716 from November

2006 and had increased 6,000 between October and November this year.

Many economists expect delinquencies and defaults to rise further after the

holiday shopping season.

Mark Zandi, chief economist and co-founder of Moody's Economy.com Inc.,

cited mounting mortgage problems that began after this summer's subprime

financial shock as one of the culprits, as well as a weakening job market in

the Midwest, South and parts of the West, where real-estate markets have

been particularly hard hit.

"Credit card quality will continue to erode throughout next year," Zandi

said.

Economists also cite America's long-standing attitude that debt - even

high-interest credit card debt - is not a big deal.

"The desires of consumers to want, want, want, spend, spend, spend - it's

the fabric of our nation," said Howard Dvorkin, founder of Consolidated

Credit Counseling Services in Fort Lauderdale, Fla., which has advised more

than 5 million people in debt. "But you always have to pay the piper, and

that can be a very painful process."

Filing for bankruptcy is no longer a solution for many Americans because of

a 2005 change to federal law that made it harder to walk away from debt.

Those with above-average incomes are barred from declaring Chapter 7 - where

debts can be wiped out entirely - except under special circumstances and

must instead file a repayment plan under the more restrictive Chapter 13.

Personal finance coaches say the problem is most grave for individuals who

are months delinquent or already in default - like Kenneth McGuinness, a

postal clerk from Flushing, N.Y.

His credit card struggles began nine years ago, when he charged his son's

college tuition and books. He thought he was being clever: His credit card's

6 percent "teaser" interest rate was lower than the 8.6 percent interest on

a college loan.

McGuinness, 61, soon began using Citibank and Chase cards for food, dental

work and copays on doctor visits and minor surgeries. Interest rates surged

to 30 percent. Now he's $37,000 in debt and plans to file for bankruptcy in

February.

"I tried to pay what I could and go after the high-interest accounts first,"

McGuinness said. "But it just kept getting higher and higher, and with late

charges and surcharges I was going backward."

In the wake of the jump in defaults on subprime mortgage loans made to

borrowers with poor credit histories, banks have been less willing to allow

consumers to consolidate credit card debt into home equity loans or

refinanced mortgages. That is leaving some with no option but to miss

payments, economists said.

Investors also are backing away from buying securitized credit-card debt,

said Moshe Orenbuch, managing director at Credit Suisse. But that probably

has more to do with concerns about the overall health of the U.S. economy,

he said.

"It's been getting tougher to finance any kind of structured finance -

mortgages, automobile loans, credit cards, student loans," said Orenbuch,

who specializes in the credit industry.

Capital One Financial Corp. reported that delinquencies and defaults are

highest in regions where troubled mortgages are concentrated, including

California and Florida.

Among the trusts examined, Bank of America Corp. had the highest delinquency

volume, with overdue accounts valued at $5 billion. Bank of America defaults

in October were almost 200 percent higher than in October 2006.

A spokesman for Charlotte, N.C.-based Bank of America declined to comment.

Other trusts - including those linked to Capital One, American Express Co.,

Discover Financial Services Co. and those containing "branded" cards from

Wal-Mart Stores Inc., Home Depot Inc., Lowe's Companies Inc., Target Corp.

and Circuit City Stores Inc. - also reported striking increases in

year-over-year delinquency and default rates for October. Most banks and

other financial institutions holding credit card debt on their own books

also reported double-digit increases in delinquencies.

The one exception in October was JPMorgan Chase & Co.'s credit card trust,

which reported declines in both delinquencies and defaults. A Chase

spokesperson attributed this to its focus on prime borrowers and aggressive

account management.

By contrast, Capital One executives told analysts last month that the

company projected 2008 write-offs of credit card debt to be at least $4.9

billion. This projection, analysts were told, took into account growing

delinquencies and potential effects if the housing market continued its

downward slide.

Capital One spokeswoman Julie Rakes said the increase in delinquencies could

be due to an accounting change last summer, which shortened the grace period

between when statements were issued and the due date.

Capital One also reported that the number of accounts 90 days or more in

arrears had increased between October and November. More than 1.2 million of

Capital One's 30 million accounts were either delinquent or in default.

Many personal financial coaches expect this trend to accelerate in 2008 -

particularly among people who took out untraditional loans whose interest

rate has risen, requiring owners to pay mortgages several hundred dollars

more than just a year ago.

"You're looking at more and more distress - consumers desperately trying to

preserve their credit lines, but there's nowhere else to go," said Robert

Manning, director of the Center for Consumer Financial Services at Rochester

Institute of Technology. "It's like a game of dominoes."