Credit card defaults rise, consumer debt spikes 75 percent

There’s a reason the economy has superseded all other issues in this election. The mortgage crisis is just the tip of the iceberg, according to leading economists. Nouriel Roubini, an economics professor at NYU, has been singing the clarion call for years: This is the beginning of the death of the American Empire, he says.

Yet while stocks rise and fall and Wall Street scrambles, another issue is unfolding on banks, consumers, and businesses.

Credit defaults are hitting an all-time high, forcing banks to hoard cash to prevent against losses, according to the Washington Post. The number of credit card defaults at JP Morgan Chase rose 45 percent in the third quarter from the comparable period a year ago, and the company predicts that 7 percent of credit card loans would go bad through 2009.

Why such an accelerated rate of default? According to a report released this week by financial analyst group Innovest, credit card debt of the average consumer has spiked 75 percent since 1999. At the same time, real wages have been basically steady since 2001 and personal savings has become nearly extinct. In fact, in 2005, the personal-savings rate was negative for the first time since the Great Depression. Since then, it’s hovered at zero.

While in the past, increasing bank competition allowed credit card users to roll their debt onto low- and zero-interest credit cards with short-term introductory rates, the drying up of credit as a result of the mortgage crisis, and therefore the increase in interest rates and card fees, will likely result in increasing defaults, Innovest and other economic experts say. Because of that, Innovest suggests, much like JP Morgan does, default charge-offs will peak at 10 percent in the next three quarters, spelling even bigger problems for banks and Wall Street and, most likely, taxpayers.

As we reported before, credit card companies are doing everything they can to increase funds, even if it means trapping consumers. They’re raising interest rates willy-nilly. They’re adding finance charges and other inconspicuous fees. They’re shortening grace periods. They’re changing due dates. And while at the same time banks are looking to consumers to pay for the banks’ mistakes, more than 83 percent of credit card companies have adjusted their lending standards in the last quarter as a result of the crisis, according to the Federal Reserve.

While it’s a good thing for many consumers if banks tighten their lending standards instead of pushing nefarious loans and credit cards onto consumers who can’t pay them, the changes don’t exactly spell good news for the current consumer whose credit card debt has increased by 75 percent in less than a decade. For one thing, lowering credit limits, even for consumers who have excellent payment histories, will affect credit card scores for millions of consumers. FICO, for example, considers a debt-to-limit ratio over 40 percent to be a mark on a credit score. An increased debt-to-limit ratio will affect the average consumer’s credit report for years to come.

But in the very near future, consumers could be even more in trouble than anyone wants to believe. For one thing, unemployment is rapidly rising, decreasing even further disposable income. Add to that rising food and energy costs, and whittled-away equity as a result of the housing crisis, and consumers are more strapped than in recent history. And while the drumbeat of some has been that consumers got themselves into this mess in the first place, Innovest’s study offers evidence of the contrary.

“We hope to see lenders targeting riskier borrowers have appropriately conservative strategies and products,” the authors write. “In reality, this generally tends to be the opposite.” Innovest found evidence of fee-trapping and exceedingly high limits for subprime borrowers at most major credit card companies. The banks, or merchants of debt, call these “strategies.”

Feel like cutting up those credit cards for good yet?