Will credit cards land the next punch to the gut of our bruised financial system?
As home values fall and unemployment rises, people tend to pack their purchases onto their plastic, hoping the next month brings an improvement in their fortunes.
But signs are emerging that even that escape hatch is growing more inaccessible.
Some lenders active in the Tampa Bay area are handing out less plastic and blaming nonpaying credit card holders for waning profits. In a bit of pre-emption, American Express, considered the gold standard for charge cards, is reducing business in Florida and lowering credit limits. Discover Card reported an 11 percent dip in profits last month.
"We are issuing fewer cards, though not through design or desire," said Linda Darling, chief financial officer of Suncoast Schools Federal Credit Union, which has close to 200,000 cards in circulation. "We have plenty of money to lend."
The threat of credit card defaults emerged as a hot issue when Bank of America reported earnings this week. The nation's second-biggest bank and second-biggest in Florida listed credit card losses as a prime cause for its lower-than-expected profit of $1.8-billion.
"Deterioration has been more pronounced in California and Florida, which have been hit harder by home price depreciation and rising unemployment than in other markets," the bank said in a statement.
Some of the more pessimistic voices suggest credit card chargeoffs — the point at which a lender writes off such debt as uncollectable — will balloon by tens of billions of dollars next year.
But credit cards are a different animal from mortgages. It's one area of lending in which banks encourage people not to pay off their balance by the due date. The problem shouldn't approach the mortgage crisis for the simple reason that people's mortgage balances far exceed their credit card balances. The average credit card balance is $2,200, the Federal Reserve says. The average balance on a subprime mortgage is $184,000.
Nor have consumers tapped cards to their full extent. According to the Federal Deposit Insurance Corp., customers have yet to use $4-trillion worth of credit as of the second quarter of this year. That suggests consumers will continue to rely on their plastic, not just for luxuries but also for necessities like groceries.
"Credit cards have become a very important cash-management tool," said Bucky Sebastian, president of Tampa's GTE Federal Credit Union.
But lenders are preparing the ground for fallow times. American Express and Capitol One both increased loan loss reserves — the money they put aside to cover nonpayers. Banking groups report a slight uptick in late credit card late payments through June 30. That's led to a tightening of credit limits, according to the Consumer Bankers Association.
"Consumers should realize this is a trend because of economics. They shouldn't take it personally," CBA spokeswoman Tracey Mills said of the growing stinginess.
Darling said her credit union typically cuts off credit cards only when it notices a customer is defaulting on other loans with the institution. Otherwise it runs the risk the delinquent borrower will advance cash from a credit card to cover a mortgage or car loan. "We're not going to take on unusual risk," Darling said.