Credit card defaults have been rising for about a year, and observers say measures that issuers have taken in recent months will make the problem worse, at least in the short term.
Issuers have been reducing the number of cards they offer, freezing balance transfers, and lowering credit limits. By decreasing the availability of credit to many consumers, analysts said, these measures could push more of them into defaults and raise chargeoff rates. However, some of the analysts also said issuers may be accelerating inevitable defaults, rather than causing defaults that would not happen otherwise.
Most major issuers said that their chargeoff rates rose in the second quarter, and they predicted incremental increases in defaults for the near term. Bank of America Corp., which reported third-quarter earnings Monday after the market closed, said its chargeoff rate rose 173 basis points from a year earlier and 44 basis points from the second quarter, to 6.4%.
The Charlotte company also predicted further increases tied to rising unemployment.
"Clearly, with current net losses at 6.4%, should unemployment rise above 7%, we would expect to see losses exceed 7%," Joe Price, B of A's chief financial officer, said on a conference call.
The company has taken "loss mitigation initiatives" in its card portfolio, "including increased collection efforts and tighter account management," he said.
In a report scheduled for release Tuesday, the consulting firm Innovest Strategic Value Advisors predicts that industrywide chargeoffs will rise precipitously, peaking next quarter at 10%, a rate far higher than the numbers posted for the second quarter by most major issuers. (One exception was Washington Mutual Inc., which charged off 10.8% of its card portfolio. JPMorgan Chase & Co., which recently bought Wamu's banking operations, has said it would let half of the portfolio run off.)
Laura Nishikawa, an analyst with Innovest who co-wrote the report, said in an interview last week that issuers have been helping to drive up chargeoff rates by taking steps like freezing balance transfers, reducing lines, and limiting access to other types of consumer credit, like home equity lines.
These typical risk management tactics are having an "unintended consequence," Ms. Nishikawa said. "When they reduce credit availability, consumers won't have the ability to roll" their debt over, and the issuers will essentially force customers into default.
Cynthia Ullrich, a senior director in the asset-backed securities group at Fitch Inc., said that the tightening of lending standards for current cardholders could lead to a short-term increase in chargeoffs.
But that result is "something issuers would do knowingly," she said. Issuers "shrink the denominator" of available credit "in order to have lower losses in the long-term," even though "it could definitely result in higher losses for a short period of time."
Craig Maurer, an analyst at Credit Agricole Group's Calyon Securities, agreed.
"By capping the credit lines, they're probably actually limiting what the peak loss rate would be," he said. "They're probably shortening the time to that peak, but I imagine they're also controlling that peak." Some consumers who would otherwise survive may be pushed into default by these measures, but "that's not going to be the majority," Mr. Maurer said.
The tightening of standards "becomes a little more problematic in the case of small businesses" that rely on credit cards, he said, when their "employees are out there with a fleet of business cards" and "find their credit lines cut down to an existing balance."
Ken Clayton, the senior vice president in charge of card policy for the American Bankers Association, said issuers' "risk management activities" are not driving the rising losses. "It's the economy."
Those activities include reducing account limits, raising interest rates, increasing the minimum credit score for receiving credit offers, and reducing the number of overall offers. The Chicago market research firm Mintel International Group Ltd. said the second-quarter volume of credit card mail solicitations fell almost 15% from a year earlier, to 1.54 billion.
On Tuesday the Federal Reserve Board said revolving consumer debt, excluding loans secured by real estate, fell 0.8% in August from July, to $969 billion.
Keith Horowitz, an equity analyst at Citigroup Inc., wrote in a note to investors Monday that B of A's unsecured consumer lending business accounted for $1.3 billion of a $2 billion increase in the company's third-quarter loan-loss reserves. A "sharper increase" in net chargeoffs than in delinquencies at the company "is reflective of tighter credit conditions," Mr. Horowitz wrote. He also predicted that B of A's credit card losses would peak at 8% to 9%.
Other observers cited the rising price of consumer goods and an increase in personal bankruptcy filings (which jumped more than 26% in the first quarter from a year earlier, to almost 237,000, according to a PaymentsSource analysis of U.S. Bankruptcy Court data).
Mr. Maurer said issuers, having learned from the mortgage crisis, are trying to avert a similar fate by pulling back on lending preemptively. "If you're allowing someone who is accessing credit just to pay off other credit, you're not fixing the problem, just moving it. That's sort of what's gotten us into the hot water in the first place."
