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Credit card companies up to their knees in cash–and this time they’re not kneeling

by Peter Andrew
Credit card companies up to their knees in cash–and this time they’re not kneeling

In Oscar Wilde’s “Lady Windermere’s Fan” a character observes: “We are all in the gutter, but some of us are looking at the stars.” Well it feels like only yesterday that the nearly lifeless forms of the major credit card companies were blocking Wall Street storm drains, and their executives were seeing stars rather than gazing up at them.

How things have changed. Today, those same credit card companies are back on their feet. And, if they felt like it, they could afford to buy their very own world-class observatories.

Credit card trends positive

One of the reasons that card issuers are so much stronger again is that they’re having to charge off (write off as uncollectible) so much less credit card debt than they were until recently. And many experts expect the outlook to continue to improve.

On July 1, Equifax, one of the big-three credit bureaus, published the latest edition of its monthly report on credit card trends and other consumer credit metrics. It found that the number of high-risk consumers was falling, which, it said, signaled “an improvement in consumer behavior.” In a statement, Michael Koukounas, Equifax’s Senior Vice President of Client Services, remarked:

Despite concerns of the economy relapsing, several current metrics indicate the credit cycle is stabilizing – even growing somewhat as consumer payment behavior improves.

The report also found that:

  1. Credit card originations were up more than 35 percent during the year ending March 2011
  2. Credit limits on cards were also up, although Equifax did not say by how much

Credit cards making money again

The extent to which banks are benefiting from the trends outlined in the Equifax report is clear from Discover Financial Services’ second-quarter profits, which were posted June 23. Some of the highlights of the bank’s results, reported by Bloomberg, included:

  1. Net income for the quarter ending May 31 was $600 million, more than 100 percent up on the same period last year.
  2. Losses on uncollectible credit card debt almost halved to 4.82 percent in that 2011 quarter, down from 8.82 percent during the same time in 2010.
  3. Because it expects much less unrecoverable credit card debt, Discover reduced the reserves it holds to cover such losses by $401 million, which did wonders for its cash position.
  4. Year-on-year, credit card use among Discover customers jumped 9 percent to reach purchases of $25 billion.

Credit card companies aren’t all equal

To be fair, Bloomberg characterized these results as Discover outperforming many of its rivals. So not all credit card companies are doing quite as well. However, there seems no doubt that the sector as a whole has turned a corner. Or, at least, dragged itself out of the gutter.

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