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Consumers Hampered By Credit Card Debt

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Bloomberg News

Published: October 12, 2008

Credit card delinquencies and charge-offs rose in August as consumers struggled to pay off debt amid a slowing economy, according to Standard & Poor's.

Charge-offs increased 0.4 percent from July to 6.5 percent. Payments more than 30 days late rose 0.1 percent to 4.5 percent, S&P analysts led by Kelly Luo and Ildiko Szilank in New York said in an Oct. 7 report.

"More and more credit card users are having difficulty paying more than the minimum balance on their credit card balances," the analysts said.

Consumers are falling behind on their bills as the job market falters and it becomes harder to get loans. The Conference Board's Employment Trends Index fell to 108.4 in September, its lowest level in four years. Consumer credit unexpectedly fell by $7.9 billion in August to $2.58 trillion, the largest drop on record, according to the Federal Reserve.

The payment rate on credit card debt fell 0.6 percent to 18.9 percent in August, a 10.4 percent decrease from a year ago, the S&P report said.

"The decline reflects the impact of a weaker economy and the lack of alternative funding sources that helped borrowers pay down credit card debt in recent years," the analysts said.

S&P expects losses in the credit card sector to continue to rise. David Wyss, S&P's chief economist, predicted that charge-offs will peak at about 7.8 percent in the third quarter of 2009. The forecast assumes the unemployment rate rises to 6.75 percent, from the current 6.1 percent rate, the highest level since 2003.

Higher loss rates could lead S&P to cut ratings on some bonds backed by credit card payments, the analysts said in a separate report dated Oct. 6. Lower rated bonds are more likely to be cut, they said.

S&P rates about $443 billion in debt backed by payments on bank credit cards. While downgrades could increase given recent economic forecasts, "defaults remain unlikely," the analysts said.

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