Friday, January 4, 2008

Deterioration of finances is the by-product of the sub prime mortgage crises leads to rise in unpaid credit card bills

On analyzing of financial data from the country’s largest card issuers it was found that Americans are falling back on their credit card payments. The situation has reached at an alarming rate that the failure and defaults are increasing by double-digit percentages in the last year and sending remainder of warnings of worse to come.

Experts are of view that the warnings of the deterioration of finances of many households are to a certain extent are the by -product of the sub prime mortgage crisis and could bring more trouble ahead for an already sputtering US economy. “Debt eventually leaks into other areas, whether it starts with the mortgage and goes to the credit card or vice versa,” said Cliff Tan, a visiting scholar at Stanford University and an expert on credit risk. “We’re starting to see leaks now.”

A study conducted by 17 large credit card trusts showed that the value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October from a year earlier. The figures show more than 4 per cent of the total outstanding principal balances owed to the trusts on credit cards that were issued by banks such as Bank of America and Capital One and for retailers like Home Depot and Wal-Mart.

According to filings made by the trusts with the US Securities and Exchange Commission (SEC) showed in October defaults — basically when lenders give up hope of ever being repaid and write off the debt — rose by 18 per cent to almost $961 million. The reports from America’s biggest lenders, including Advanta, GE Money Bank and HSBC, reveal serious delinquencies have risen sharply. It reported increases of 50 per cent or more in the value of accounts that were at least 90 days delinquent when compared with the same period a year ago.

After analyzing the data it has come out that around 325 million individual accounts held in trusts that were created by credit card issuers in order to sell the debt to investors — similar to how many banks packaged and sold sub prime mortgage loans. All together, total for about 45 per cent of the $920 billion the US Federal Reserve counts as credit card debt owed by Americans.

Till recently, US credit card default rates had been going down close to record lows, providing one of the few profit growth areas for US banks, which continue to flood Americans’ mailboxes with billions of letters monthly offering easy sign-ups for new plastic. Even after the recent step-up in bad loans, the credit card business is still quite rewarding, because of the interest rates that can run as high as 36 per cent, plus late fees and other penalties.

However, from the detailed monthly SEC filings from the trusts one gets a sharp and clear picture of the worrying state of Americans’ ability to manage growing and expensive credit card debt.

According to many economists the delinquencies and defaults can further increase after the holiday shopping season. Mark Zandi, chief economist and co-founder of Moody’s Inc, quoted increasing mortgage problems that began after this summer’s sub prime financial shock as one of the cause, as well as a weakening of job market in the Midwest, South and parts of the West, where real-estate markets have been particularly hard hit.

“Credit card quality will continue to erode throughout next year,” he said. Economists also cite America’s long-standing attitude that debt — even high-interest credit card debt — is no big deal.

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