Financial Times FT.com By Saskia Scholtes in New York
Published: August 27 2007 19:02 | Last updated: August 27 2007 19:02
US consumers are defaulting on credit-card payments at a significantly higher rate than last year, raising the prospect of problems in the stricken US subprime mortgage market spreading to other types of consumer debt.
Credit-card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate – a measure of cardholders’ willingness and ability to repay their debt – fell for the first time in more than four years.
Analysts at Moody’s, the rating agency, said the trend could be related to the slowdown in the US property market and a fall in the number of borrowers rolling their mortgage debt into new and cheaper home loans.
“The combination of higher interest rates and a softer real estate market diminished the attractiveness of mortgage refinancings in which many borrowers reduced their more expensive credit-card debt by drawing on the equity in their home,” Moody’s said.
But it is not clear that the borrowers defaulting on their credit cards are the same people defaulting on their subprime mortgages, it added. This is in part because underwriting standards in the credit-card sector have been more robust than in the mortgage industry. Also, many highly leveraged subprime borrowers, with little or no equity in their homes, may choose to default on a mortgage before risking being unable to charge everyday necessities to their credit card.
But Moody’s said the rate of losses remained well below the 6.29 per cent average seen in 2004, a year before the US enacted a new law that made filing for personal bankruptcy more onerous.
The law led to a surge in individual filings and related credit card losses in 2005 as cash-strapped borrowers filed for bankruptcy before the rules came into effect.
Recent increases in credit card losses can in part be ascribed to a steady rise in personal bankruptcy filings since 2005. According to the Administrative Office of the US Courts, quarterly non-business bankruptcy filings have been rising since the first quarter of 2006.
Scott Hoyt, economist at Moody’s Economy.com said: “Consumer credit quality will continue to deteriorate as debt burdens and financial obligations rise, house prices continue to fall, credit standards are tightened, labour markets loosen modestly, and gasoline and other energy prices remain high.”
NOTE:
I have used credit cards in lieu of cash or checks for years.
This weekend I'll use my free round trip airfare on Southwest to fly nonstop to Vegas and take along my $150 cash.
Both of which I received from credit card use in just the past few months.
I've been to Florida, Aruba and Hawaii "free" and Vegas many times.
I pay off the balance monthly, reconcile my accounts just as I do with my checking (downloadable on the internet directly into Quicken) and I have an automatic electronic payment of $200 per month going to the credit card account, just in case I should forget to pay on time.
Those late fees and interest rates will eat up the benefits quickly.
Credit cards should be used for purchases only, but never for financing.
But like McDonald's cheeseburgers, some people can't use credit cards without doing damage to themselves.
Maybe they should be banned.
The people, not the cards. LOL!
Edited by Rogerdodger, 27 August 2007 - 05:51 PM.
