Credit Card Debt: a Good News and Bad News Week

Credit Card Debt Shows Overall Reduction

Last Friday, the Federal Reserve published its Consumer Credit statistical release for September 2009. It showed that American consumers are paying down what they owe. In fact, they reduced their indebtedness by $15 billion during that month alone. Unfortunately, they still owe $2,456 billion.

Still, the Fed’s figures show that outstanding revolving credit (which is largely made up of credit card debt) dropped 10 percent in the third quarter of 2009. And that can’t be bad.

Credit Card Debt a Growing Problem

How can credit card debt be both going down and be a growing problem? Well, the debt that’s being reduced belongs mainly to people who can afford to repay it. For them–and for those who lent to them–it wasn’t a problem in the first place.

Those who do have a problem are the unemployed, and 10.2 percent of Americans now fall into that category. Add in those who are working part-time jobs because they can’t find full-time employment, and those who have given up looking for work because they’ve given up hope of finding anything, and that number jumps to 17.5 percent.

That’s causing credit card companies all sorts of problems. And when credit card companies face difficulties, their first instinct is to pass the pain on to their customers.

Credit Card News Not Good

Last week, CNN Money carried a report entitled Credit card issuers fight for more profit. It said that: “A good rule of thumb is that the level of credit card losses is usually about one percent higher than the unemployment rate.” And it went on to quote predictions from Moody’s that growing losses for credit card companies would continue until mid-2010, when they’re expected to peak at 12 percent.

Bank of America’s Special Pain

Bank of America (BofA), which is the nation’s second largest issuer of Visa products, and third largest issuer of MasterCard-branded cards, faces particular difficulties. Its credit card “charge-off rates” (the debts that it thinks it won’t recover) are currently running at 14.25 percent, against an industry average of about 10 percent.

And last Friday, BofA took the unusual step of including a new risk factor in its third quarter report. Companies have a legal obligation to reveal new risk factors only in their annual reports, and rarely offer them up part way through a year. So it’s likely that the bank perceives this new risk as posing a serious threat to its business.

And what is the risk? Looming legislative and regulatory pressure.

Look on the Bright Side

Increased regulation may cause banks pain, but it just may also protect consumers. BofA reckons that it’s likely to lose $200 million in revenue in the fourth quarter because it’s made its overdraft rules fairer. And that move anticipated legislation.

Credit card regulation, in the form of the Credit CARD Act, is going to be implemented soon. It should be interesting to see whether it makes credit card terms fairer.