Bad Credit Card Debt of $100 Billion in 2009
Oct 20th, 2008 | By Rob | Category: credit card debt
A recent research report by Innovest predicts that charge-offs on the bad credit card debt of consumers by financial institutions will be around $100 billion in 2009, up from an expected $40 billion in credit card debt charged off by financial institutions in 2008. The report places the blame for the increase in bad debt on the deteriorating financial health of consumers and the decrease in credit availability.
Credit card charge off rates are already up between 40-50% from 2007 levels, and are expected to get worse as the economy slows and unemployment picks up. Since credit card debt is charged off when the company believes that the debt cannot be collected or the account has received no payment in the past 120 days, consumers who stopped paying on their credit card accounts during the freezing of the capital markets in September and October have not yet had their accounts written off by credit card issuers. And as the national average unemployment rate increases to its anticipated 7-8 percent in 2009 from its current rate of 6.1 percent (California, for example, is already at an unemployment rate of 7.7 percent), more consumers who are having difficulty making their debt payments while they are employed will not be able to make their credit card payments while on unemployment.
From the answers to a recent survey by Standard & Poor’s on consumers use of credit cards, it appears that about 36 percent of credit card holders are currently struggling with their debt levels. Standard & Poor’s reported that:
One in five individuals surveyed indicate they are “sometimes” (14%) or “always” (6%) unable to pay their credit card and/or loan(s) balances each month. An additional 8% can only make minimum payment required and another 8% either always or sometimes pay less than the minimum.
Despite these numbers, I haven’t seen predictions that the problems with the credit card market will be as bad as the problems in the mortgage market. The mortgage market is much larger than the credit card market, and I’ve seen statements that credit card companies have more experience dealing with recessions than the real estate industry.
I don’t know that I buy these arguments, yet. If credit card debt is the next shoe to drop following the real estate bubble and mortgage mess, then what unintended consequences will result from the inability of consumers to repay their credit card debt? That is the problem that people should be concerned about!
