Credit Card Defaults

Things are looking great, right! The end of this recession is near. The markets rallied last week and it appears to be continuing this week. New home construction, a market indicator, unexpectedly increased, albeit from record lows. Hurray! If you spend any time watching the pundits on T.V. this is what you would believe. So, we're out of the woods right?

I wouldn't get your hopes up.

Credit card defaults jumped...again. Reuters reported that credit card defaults hit a 20 year high. American Express reported that its net charge-off rate, the debts companies believe they will never be able to collect—rose to 8.70 percent in February from 8.30 percent in January. Once again it appears that Citigroup made some poor business decisions. Their default rate rose to a staggering 9.33 percent from 6.96 percent just last month! This proves the valitility of the market and how fragile things really are. In a single month, 2 additional people out of 10 can no longer pay off their credit card bill. When people started to lose their jobs, I believe a large portion decided to continue to pay their credit cards bills while neglecting their house payments which led to an increase in home foreclosures. But, eventually, it becomes difficult to pay off your monthly expenses. All it takes is one unexpected bill; a broken arm, car registration and insurance, a parking/speeding ticket or two...and then you are behind your in your payments. Most of the time the interest credit cards charge jump with the first missed payment and it becomes very, very difficult to keep up.

The US public holds over a trillion dollars of credit card debt and much of it was securitized and sold like home mortgages. I think you will start hearing a lot more about credit card defaults. This will shock the markets, especially if in the meantime we convince everyone that the problems are behind us.

Did we really think this trend could last forever?