Not a huge amount has been written about how much of a hit banks will take from charging off bad credit card loans. But the simple truth is that credit card loans are among the worst for banks since there is nothing there to seize as collateral if the borrower can't repay. So the people who don't repay inspire banks to raise rates and fees on everyone, so we all end up paying for the credit card deadbeats.
Consider 32-year-old Arkansan Eddie Ward who lost is job in a retail warehouse last month and says he won't be able to pay off his $20,000 credit card loan unless he wins the lottery.
People like Eddie will cost banks $186 billion by 2010 or 2011 -- up 313 percent from 2008's $45 billion. The good news for the banking system is that, as I posted, credit cards are not the new subprime because -- unlike subprime -- bad credit cards loans are not that big a part of most banks' income statements and they have not been heavily securitized. Nevertheless, a handful of banks are feeling the pain more than others. Here are the banks expected to take the biggest percentage charge-offs of bad credit card loans and their expected percentage losses:
American Express (AXP): 20 percent
Capital One Financial (COF): 20 percent
- Bank of America (BAC): 23 percent
- Citigroup (C): 23 percent
- JPMorgan Chase (JPM): 23 percent
The average consumer has an $8,400 credit card balance and President Obama is pushing to pass a bill that would limit credit card issuers' ability to raise interest rates on borrowers retroactively. And as the unemployment rate rises -- it hit 8.9 percent in April -- so does the charge off rate for those credit card loans.
Here's the interesting thing about the credit card business. The credit card companies want people to carry those balances since they likely lose money on people who pay off their balances each month. What they want is for people to carry a balance and to make interest payments each month at 29 percent on a portion of their loan.
If it were up to the credit card companies, they would only make the cards available to people who could afford to keep making those payments through ups and downs in the economy. But with their current stresses, they'll likely have to take a hard look at whether it is still a profitable business.
And with $186 billion in potential losses looming, some might even consider getting out of credit cards altogether.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares and has no financial interest in the other securities mentioned.