Credit Cards Feeling the Crunch

With the economy still growing, albeit at a very slow pace, and consumers keeping their heads mostly above water, different theories abound as to why the financial crisis hasn't hurt the real economy and clipped consumer spending.

But recent developments in credit card payments, cast doubt on the idea that American consumers are just a bunch of whiners. Moody's reported yesterday that credit card charge-off rates -- the percentage of credit card account balances that are written off as uncollectible, an indicator of the level of real pain consumers are feeling -- hit 6.4 percent in May. That's close to the 7 percent level reached during each of the past two recessions, and all signs point to charge-off rates breaking through those marks during the current downturn, Moody's analysts say.

On the bright side, delinquency rates have fallen two months in a row, but Moody's thinks this is the result of the economic stimulus package.

It is doubtful that this sequential improvement will continue for long if the economy does not improve in the second half of the year.

Other rating's agencies are finding similar trends.

The Financial Times also reported today that credit card problems are reaching the wealthy:

Kenneth Chenault, chairman and chief executive, said the most affluent card-holders were feeling the pinch. "The scope of the economic fall-out was evident even among our longer-term, super-prime card members."
Card issuers are cutting back on credit lines, and scaling back on new card issuance. But credit card experts warn these moves could have long-term repercussions on consumer spending. They argue that credit line reductions and failed card applications negatively affect customers' credit scores, making it harder for them to obtain loans and mortgages and deepening their financial woes.

With nearly one-year passed since the "official" start of the credit crunch, and the jolt from the first stimulus package fading, it might be time to consider a second.