Credit and Debt Blog

Credit card issuers have been more than happy to take advantage of the subprime mortgage debacle. They know that distressed homeowners will often run up credit card balances rather than fall behind on a mortgage payment. As many of the adjustable rate mortgages reset their fees, many homeowners tried to keep up by charging living expenses on credit cards.

Up to now, some credit card issuers have profited handsomely from the increased credit card use. The question is, how long can credit cards absorb the further eroding of consumer finances? There are signs that the credit card industry is set for a big hit.Citibank, American Express and Bank of America, among others, have announced sharp reductions in earnings for the previous quarter. As such, major credit card issuers are setting aside additional reserves in anticipation of increased consumer delinquencies on credit card debt.

They know that many of their cardholders are in worse shape financially than two years ago. Here are three signs that credit card companies may be facing even higher delinquencies over the next year:

1. According to Citi, their average card balances are beginning to increase and cash advances are on the rise. Their delinquency rate has not yet gone up, but it likely will given the current trend in their portfolio.
2. Capital One, Bank of America and Washington Mutual are expecting losses related to credit card defaults to increase 20% in the coming year. In fact, the average quarterly delinquency rate has already increased from -2% to 13%. This is sure to take a bite out of their stock price. Still, the fees and interest income will allow these companies to weather the storm.
3. Bankruptcy filings are increasing. Chapter 7 filings have gone up more than 51% in the 15 months leading up to July 2007. Most industry analysts agree that bankruptcy filings will continue to increase over coming months.

Credit card issuers and debtors alike will at least find some relief through nonprofit credit counseling programs. Credit card issuers created credit counseling decades ago, and now they will need it even more to help their debtors recover from tenuous financial situations.

This definitely shows that no financial sector is independent of another. As such, we continue to help debtors with all aspects of their financial situation. Unsecured debt, mortgages, car loans, budgets, income and even net worth are all components that must be examined.