Bankruptcy

Marginal Credit Card Borrowers Come Back to Haunt Banks

By Angie Littwin

The New York Times just ran a fascinating, short piece on the relationship between unemployment and credit card defaults.  Historically, there has been a strong correlation between the two, and there still is.  But this time around the measures are no longer traveling neck and neck.  In the current recession, increases in the unemployment rate are starting to predict increasingly large spikes in credit card defaults.  Reporters Eric Dash and Andrew Martin provide a great graph depicting this trend. 

The article offers a few explanations for this changing relationship, the most important being that laid off credit card borrowers have a decreased ability to cushion periods of unemployment with home-equity loans and retirement withdrawals than they did in recent recessions past.  But it misses one crucial additional reason for this shift:  loans to weaker borrowers comprise a larger percentage of credit card portfolios than they ever have before.  Over the past three decades, credit cards have made their way down the income distribution, until just about anyone and their dog (literally) could get one.  Many consumer advocates criticized this development, arguing that heavy credit card debt was negatively affecting families who were already struggling.  Deregulation proponents responded with the argument that financially constrained people were more than capable of managing the new, copious amounts of credit being offered, thank you very much. But we all may have missed one important point.  It was really the banks we should have been saving from themselves all along.

Full post as published by Credit Slips on May 12, 2009 (boomark / email).