Bailout

More good news, for debt collectors

By Felix Salmon

When the financial crisis caused a sudden stop in the availability of home equity lines of credit, credit-card default rates naturally spiked. No longer could consumers spend as much as they like, and then, when their credit-card debt got out of control, pay it all off with a cash-out refinance.

But two years after Lehman Brothers collapsed, credit card default rates are still high — in fact, at 10.8% in the second quarter of 2010, the charge-off rate is hitting new highs and rising alarmingly. (It was 9.8% in the same quarter of 2009, and 10.1% in the first quarter of 2010.)

Consumers are continuing to rack up new credit-card debt: far from paying down their balances at all, they’re charging new stuff every month. Yes, the total amount of credit-card debt outstanding is falling — but that’s only because the banks have given up on collecting an enormous amount of it — they wrote off $81.6 billion in 2009, and another $43.5 billion in the first half of 2010.

I, for one, didn’t expect credit-card charge-off rates to rise in 2010: aren’t we meant to be in a recovery? Weren’t they extremely high to begin with? Haven’t card companies been reducing credit limits and generally trying to rid themselves of uncreditworthy customers for a couple of years now?

I do think that this data series is probably going to prove a good proxy for the point at which the US population as a whole gets less pessimistic and begins to think that we’re no longer in a recession. I don’t think that the goods being charged onto these credit cards are silly luxuries: it’s just that for a very large part of the country, it’s extremely difficult to live within your means. The banks keep on having to write off credit-card loans as it becomes clear they will never be repaid — but just because a loan is written off, doesn’t mean it disappears. The debt remains, and will weigh down the cardholders’ finances for many years to come. It just now belongs to debt-collection agencies rather than banks.

Full post as published by Macroprudential on September 14, 2010 (boomark / email).