April 27, 2009
More consumers were unable to pay their credit card debt in February,
as more accounts were placed on the "uncollectable" list. In a report,
Fitch Ratings said its "charge-off" index, which tracks uncollectable
credit card debt, surged to a record 8.41 percent.
That means the rate has increased more than 28 percent in the last half year and is up almost 50 percent over the last 12 months.
"As consumers struggle between surging unemployment and steeper declines in home and equity market values, they have been cutting spending and a larger percentage have fallen behind on their credit card bills," the company said.
Not only is uncollectable debt higher, so is delinquency. Fitch said it Delinquency Index is at 4.33 percent, the third straight month it has reached a record high.
That trend discourages many economists, who have worried that the subprime mortgage crisis would eventually be followed by a credit card crisis. Just as mortgages were bundled into securities and sold to banks as "low-risk" investments, so too were credit card accounts. If consumers begin defaulting on credit cards in enough numbers, it adds pressure on the credit industry before it even begins to recover from housing.
Fitch says the numbers may help consumers understand credit card actions in recent months, as many lenders have unilaterally closed customers' accounts, raised interest rates and lowered credit limits.
These actions give the lenders a cushion against future losses, even while driving away some customers who had been loyally using the card and paying on time for years. In other words, while uncollectable debt is rising, credit cards are making more money from the customers who are still paying.
For example, Susan, of Allen Texas, said Chase raised her interest rate to nearly 30 percent after it said she was late making a payment.
"The balance on this card is in excess $14,000.00," she told ConsumerAffairs.com. "I have no idea how we will ever pay this off."
So far, the credit card lender strategy is working. The much-feared credit card crunch has yet to materialize, as credit card company balance sheets remain healthy, despite the write-offs.
But as more consumers, like Susan, are suddenly paying 30 percent on a $14,000 balance, that could change.
