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Credit card companies doing well–for now

by Peter Andrew
Credit card companies doing well–for now

Back in July, IndexCreditCards.com published a news blog that reported on the remarkable recovery in credit card companies’ fortunes. It said that, after many quarters of painful losses, they were again generating serious revenues and healthy profits.

Credit card companies still doing well

It looks as if that situation hasn’t changed. Yesterday, Discover Financial Services published its third-quarter results, and Bloomberg reported that they beat by a significant margin the average of analysts’ expectations. Net income was $649 million that quarter, up from $261 million during the same period in 2010.

There seem to be two main reasons for this:

  1. The volume of credit card sales jumped 9 percent compared to the same quarter last year, and reached an all-time high of $26.3 billion.
  2. Provision for bad credit card debt fell precipitously over the same period: to $100 million, down from $713 million.

It has to be said that Discover frequently outperforms many of its competitors, but there’s little reason to expect other credit card companies not to follow this general trend.

Credit card debt worrying

The fact that Discover expects so much less bad credit card debt in the short term is great. But there does seem to be a real question mark over how long that happy situation is going to last.

Also yesterday, CNN Money reported on research that predicts that Americans could add roughly $54 billion to their revolving credit card balances during 2011. In the second quarter alone, according to the report, they added $18.4 billion, 66 percent more than they did during the same period last year, and 368 percent more than in the second quarter of 2009.

Increases in bad debt tend to lag behind increases in actual debt, because most people keep up payments, at least for a while. But with the economy looking increasingly shaky (right now, you need a strong stomach to check the Dow) this could be a bad time for consumers to be adding to their financial burdens.

In August, the average “charge-off” (when credit card companies write off bad debt and pass it to collection agencies) rate for Bank of America, Capital One, Chase, Citi and Discover inched up to 5.17 percent from 5.15 percent in July. It was the first time in a year that there’d been a rise.

Credit card rates another factor

At the time of writing, the IndexCreditCards.com credit card rate monitor says that the average interest rate across all cards is 16.3 percent, which is exceptionally high. Indeed, iStockAnalyst said earlier this week that current credit card rates are at their highest for a decade.

That adds to the danger of rising card debt because high rates make it make it more likely that families and individuals unwittingly blunder into a downward spiral in which ever-increasing proportions of their disposable income are eaten up by interest payments. Should the growing threat of a double-dip recession be realized, then that problem could be compounded, and card issuers may well find bad debt again undermining their profitability.

Let’s hope that the people in credit card companies who make lending decisions are smart enough to recognize that. But if you’ve read Credit card lending: bring on the tripping goldfish, you may not be optimistic.

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