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Unemployment Hits Credit Card Debt

The rising unemployment rate is taking its toll on credit card debt. Outstanding loans are declining and loan defaults are rising. It's expected to get much worse as unemployment, which reached 9.5 percent in June, rises to more than 10 percent in the coming months.

According to the Federal Reserve, revolving loans, which are overwhelmingly credit card related, fell by 3.75 percent in May. The annualized rate had fallen 11.1 percent in April and registered double digit declines in February and March as well. The decline in revolving credit from October 2008 to May 2009 is the longest pullback since 1968, according to the Fed.
At the same time, credit card defaults are on the rise. According to Standard & Poor's, bank card defaults, loans the banks don't expect to be repaid, rose to a record 10 percent in May. Delinquencies, which are credit card payments more than 30 days overdue, fell from 6.1 percent to 5.7 percent. That's because borrowers tend to pay down their credit cards when they get income tax refunds in April.

The American Bankers Association, which reported that bank card delinquencies rose marginally in the first quarter of 2009 compared to the fourth quarter of 2008, said the deteriorating credit situation was due to rising unemployment. "The number one driver of delinquencies is job loss," said ABA chief economist James Chessen. "When people lose their jobs, they can't pay their bills. Delinquencies won't improve until companies start hiring again and we see a significant economic turnaround."

Consequently, it's no surprise that default rates are also rising. Bank of America, which has expanded its credit card business rapidly in recent years, reported that the default rate on its cards had risen 12.5 percent in May from 10.47 in April. American Express said its default rate had climbed to 10.9 percent from 9.9 percent in the same period.

The credit card companies have responded by making credit card borrowing more expensive to compensate them for growing losses. It has the unfair effect of charging customers who pay their bills on time for the sins of those who don't.

In the last two weeks, a number of major banks were reported to have raised their interest rates, in some cases from eight percent to 18 percent.

In part this is in response to the Credit Card Holders' Bill of Rights that was passed by Congress in May. Under the new law, which doesn't take effect until February, creditors can't hike rates on existing borrowers unless their accounts are more than 60 days late on making a payment.

Some banks are finding additional loopholes in the legislation. The rules prohibit some fees but not charges for balance transfers, cash advances or late payments. So card companies are already boosting their balance transfer fees.
Another change that is taking place is that banks have begun notifying some customer that the fixed rate on their credit card debt is being converted to a variable rate tied to the prime rate. Discover Financial Services made the switch in March. Nearly all of Bank of America's fixed rate loans will be converted to the new variable rates. Some student accounts and newly opened accounts will not be affected. J.P. Morgan Chase customers will be able to opt out of the changes.

Consumers can expect more such changes as the date for the implementation of the Bill of Rights approaches. Banks are very creative in finding new ways to make money, even as the unemployment rate skyrockets.

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