AmEx Won't Be the Only Loser As Credit Card Delinquencies & Defaults Skyrocket

Implications: Consumers spent more than $2.5 trillion in 2007 on credit card purchases and cash advances, however, consumers are falling behind on credit card payments at an alarming rate, sending delinquencies and defaults skyrocketing. The value of credit card accounts at least 30 days late rose 26% to $17.3 billion in October 2007 and defaults rose 18% to $961 million. AmEx issues approximately 85 million cards and payments began to tail off in December 2007, when customers failed to repay their debts. AmEx will take a $440 million charge and Capital One plans to write-off $650 million in unpaid credit cards. Capital One issued 30 million credit cards and 1.2 million is either delinquent or in default. BofA's defaults in October 2007, were almost 200% higher than a year ago and BofA also had the highest delinquency volume with overdue accounts valued at $5 billion. Credit card delinquencies and defaults could be a byproduct of the subprime mortgage crisis and could signal more trouble ahead.

Analysis: AmEx, Capital One, Discover and others reported striking increases in year-over-year delinquency and default rates in October 2007 and issuers are seeing the greatest rise among accounts more than 90 days in arrears. AmEx and other issuers saw delinquencies and defaults at their highest in regions where troubled mortgages are concentrated, including CA and FL. Discover, Bank of America, Citigroup Inc., Chase and Capital One issue about 80% of U.S. credit cards and until recently credit card default rates had been running close to record lows, providing one of the few profit growth areas for banks.

1.  Visa and MasterCard control 80% of credit card purchase volume and Visa cardholders conducted more than $1 trillion in annual volume.  Visa's market share is 54%; MasterCard owns 29% market share, followed by AmEx with 13% market share and Discover with 4% share.  Visa and MasterCard's purchase volume may spike in volume in 2008, as consumers use their credit cards to pay their bills, buy groceries and other day-to-day necessities to stay afloat during a possible U.S. economic downturn

2.  Factors such as the housing slump, tighter credit, high oil prices and rising unemployment in the U.S. has made it harder for many consumers to pay their bills, which could cause credit card problems to worsen as consumers become delinquent on paying their credit card bills and others are defaulting on their credit cards, which could potentially lead to more charges and write-offs from credit card issuers and the card networks

Takeaway:  Because of the jump in defaults on subprime mortgage loans, banks have been less willing to allow consumers to consolidate credit card debts into home equity loans or to refinance mortgages, which may be leaving some consumers with no option but to miss credit card payments, resulting in record level credit card delinquencies and defaults.