Banks feel the pain as credit card delinquencies surge
June 8, 2009 by admin
The Banking industry feels more pain as credit card delinquencies surge over ten percent in the first quarter of 2009 according to a recent report released from transunion. The fallout in repaying credit cards can be directly traced to the current economic struggles and mounting job losses that the economy currently faces. Credit cards are considered to be delinquent when they pass 90 days without a minimum payment being received. Once a credit card payment is ninety days past due, banks begin to work with collection agencies and often pursue legal action against the card holder. The process of winning a judgement and receiving repayment for credit card debt often leads towards significant losses for the credit card company who likely now has to write off the entire balance as a future loss for accounting purposes.
The banking industry has been heavily criticized for how they manage credit cards and payments. Earlier this year, the government passed additional reforms aimed at how banks apply credit card payment and notify customers once a credit card becomes past due. The fallout from the rising delinquencies and changing guidelines will most likely result in higher rates and lower credit limits for many consumers.
The current economic challenges that have been well documented in the housing and job market, are now beginning to find their way into the credit card and commercial loan markets, two new areas banks will have to set aside reserves for future losses. The delinquency rate for credit cards is still lower than the foreclosure rate for home mortgages, although both segments continue to see a significant increase with late payments. The government will have to closely follow the news on consumer repayment as they are now some of the largest stakeholders in the nations biggest banks and top credit card companies (Citigroup/Bank of America).
The credit squeeze that has impacted all facets of lending from home loans to car loans will likely continue to feel pressure from rising delinquencies. Banks and lenders will face pressure to lend, but will also likely follow stricter underwriting guidelines as their concerns for repayment are reinforced through the struggles of the current economy. The governments TALF program was designed to help provide additional working capital earmarked specifically towards lenders in this space as they don’t want banks to completely stop offering credit and loans to consumers. The economy has relied heavily on consumers financing their purchases over the past ten years and is struggling to adjust to new lending terms and eroding confidence from the buying public.
