Charge Offs Look to Keep Rising for Card Issuers

Credit card issuers are scrambling to reduce their risk but problems will probably get worse for the plastic merchants before they get better, according to a leading ratings advisory firm.

A recent report on card issuers from Fitch Ratings found that losses for the sector have touched or exceeded five-year averages due to oft-cited three strikes – rising unemployment, record-setting gas prices and the continuing decline in the housing market.

Fitch analysts said that the situation will probably get worse for issuers before it gets better. They predict an increase in charge-offs for the top-rated cardholders of 7 percent by the end of the year from 6.4 percent in May.

The worsening situation occurs as consumers turn to their cards for more of their borrowing needs. The Federal Reserve reported that the total amount of credit card debt outstanding in April was $956.9 billion compared with $887.6 billion in April 2007.

Discover reported last week for its fiscal second-quarter results that it expects charge offs will surge above 5 percent for the year (“STORY LINK HERE,” ). As a result, it increased its provision for loan losses 31 percent to $582 million in the quarter.

Citi recorded charge offs of 5.83 percent in its U.S. cards portfolio in the first quarter, up 1.2 percent from the same period a year ago. Washington Mutual, already reeling from losses in its mortgage portfolio, reported first-quarter net charge-offs of 9.32 percent, up from 6.31 percent a year earlier.

In response to the losses, several major issuers are cutting the amount that their cardholders can borrow each month. WaMu, HSBC and Wells Fargo are all lowering their credit limits, according to the research firm Institutional Risk Analytics.