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Credit card issuers, some of which last year believed they would be unaffected by the subprime mortgage crisis and the impact it has had on credit markets, are not immune after all. Far from it.
As this month's cover story by Cards&Payments Associate Editor Kate Fitzgerald points out, issuers experienced sharp declines in fourth-quarter income and higher charge-off rates. Analysts expect the trend to continue throughout the year.
To what extent U.S. issuers will be affected by what some economists now say is a recession is unknown. The falling exchange rate for the dollar against the euro and yen, driven in large part by the rising national debt in the U.S., is not helping to spur investor confidence. In mid-March, the Dow Jones Industrial Average was down more than 2,000 points since October.
To address these market trends, issuers are working to reduce their risks without becoming so conservative their portfolios stop growing. It is a difficult balancing act.
According to the Federal Deposit Insurance Corp., net charge-offs in the fourth quarter rose 33%, to $4.12 billion from $3.1 billion in the fourth quarter of 2006. For the year, charge-offs rose 20%, to $15.6 billion from $13 billion in 2006.
In the U.S., lawmakers approved a stimulus bill to help revive the economy. In May, individual taxpayers will receive a $600 rebate check, and couples will receive $1,200. Though President Bush is encouraging consumers to spend the money, a survey TransUnion conducted earlier this year found that 42% of consumers would use the money to pay down debt.
That may be good news for issuers. But a truly strong U.S. economy will not be achieved until consumers, and U.S. lawmakers, stop spending more than they have. That, however, would not be good news for the credit card market.
It is interesting that few debit card issuers are using the ailing economy as an opportunity to market their products. Debit cards are, after all, supposed to limit consumers' spending to what is in their checking accounts. But with many issuers offering automatic overdraft protection that enables debit cardholders to spend more than they have, and charging interest rates of 30% or more on the "loans," I can see where conflicts might arise.
