High Credit Card Default Rates--A Big Factor in APR and Fee Hikes

A look at the default statistics released last week by credit card issuers helps explain why consumers are seeing interest rate hikes and decreases in their credit limits.

Bank of America, the largest bank in the country, reported its default rate jumped to 13.8% in June from 12.5% in May. Defaults, or charge-offs, are the debts that a lender believes it will never collect.

"The biggest bank in America does not expect to collect on almost 14% of its credit card loans. That is a tremendous loss and it helps explains why Bank of America is raising rates, increasing balance transfer fees, and switching from fixed to variable rates on a number of their credit cards. They can’t continue to lose money on loans without increasing revenue in a number of ways," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Default rates and charge-offs are still weighing down the credit card industry, costing banks billions of dollars. The default rate is expected to grow as the unemployment rate increases.

"Following the credit card industry and cardholders has almost been like watching a couple during a divorce. Both sides have been hurt by the actions of the other. Cardholders are hurt and angry by the interest rate and fee increases, and the changes made by credit card issuers. On the other side, issuers are losing billions of dollars in unpaid credit card loans that they have to charge-off. Issuers have to make changes to be profitable," says Hardekopf. "Add in upcoming regulations and increasing unemployment and it may be impossible to expect a reconciliation in the near future where both parties are happy with each other."

Last week, banks and issuers released their monthly reports that included default rates. For some issuers, default rates remained about the same.

While this could be seen as a sign of stabilization, it could also be a short pause as households used tax refunds to pay down credit card balances. Here are the default rates from other major credit card issuers:

• Capital One’s rate rose to 9.73% in June from 9.41% in May.
• JP Morgan Chase defaults declined to 8.04% in June from 8.36% in May.
• Discover’s rate fell to 8.75% from 8.91%.
• American Express defaults fell slightly from 10.0% in May to 9.9% in June.
• Citigroup defaults remained unchanged at 10.5%

Since the unemployment rate is expected to increase, some observers fear that industry’s default rate could climb above 12% by the first quarter of 2010.

LowCards.com ( http://www.lowcards.com ) simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index ( http://www.lowcards.com/CreditCardIndex.aspx ) is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for all 1060 credit cards offered in this country. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for eight years.