It used to be that the card industry could predict credit-card losses by tracking the unemployment rate. No more. During the most recent earnings season, card issuer after card issuer talked about loss rates outpacing unemployment rates in the near future. The upshot is that it'll be a lot more difficult to predict just how bad -- and how high -- loss rates will ultimately get.
From the New York Times:
But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capitol One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.
Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.
And, so, cardholders should continue to expect reduced credit limits and tougher approvals. In other words, the beat goes on.
Read the whole story here.