U.S. banks have charged off $50 billion in credit card loans which represents 5.47 percent of all credit card loans. That’s an increase of 2 percent in just one year. Some are saying that the large amount of charge offs is a sign that the credit card market will be the next crisis during this recession. And some are saying that the credit card industry’s reliance on poor and low-income borrowers is the root of the problem, just like it was in the foreclosure crisis.
Innovest estimates that about 30 percent of Bank of America’s credit card loans are to subprime borrowers – second only to the failed Washington Mutual Inc., which had almost half of its credit-card loans held by subprime borrowers.
Innovest also estimates that more than half of Bank of America’s credit cards are high-limit cards – second only to American Express Co. (Innovest classifies high-limit cards as those with lines of more than $10,000.) Nishikawa says that combination could prove toxic for Bank of America, which may have “lent more than (borrowers) can be expected to pay back.”
The credit card industry is not only slitting its own throat with its insistence on making loans to those least able to pay; but they are also contributing to the rise in the number of people needing bankruptcy. Many borrowers in the subprime credit card market do not understand the financial ramifications of taking out high interest credit card loans. These borrowers may use their credit cards as a substitute for cash not realizing that they not only must repay the principal but lots of interest too. Many of these individuals are taking out cash advances from one credit card to pay another or skipping other pertinent bills to pay on their credit cards. But as the unemployment rate remains elevated and salaries remain stagnant or in some cases fall, we will see more credit card defaults.