Marginal Credit Card Borrowers Come Back to Haunt Banks

The New York Times just ran a fascinating, short piece on the relationship between unemployment and credit card defaults.  Historically, there has been a strong correlation between the two, and there still is.  But this time around the measures are no longer traveling neck and neck.  In the current recession, increases in the unemployment rate are starting to predict increasingly large spikes in credit card defaults.  Reporters Eric Dash and Andrew Martin provide a great graph depicting this trend. 

The article offers a few explanations for this changing relationship, the most important being that laid off credit card borrowers have a decreased ability to cushion periods of unemployment with home-equity loans and retirement withdrawals than they did in recent recessions past.  But it misses one crucial additional reason for this shift:  loans to weaker borrowers comprise a larger percentage of credit card portfolios than they ever have before.  Over the past three decades, credit cards have made their way down the income distribution, until just about anyone and their dog (literally) could get one.  Many consumer advocates criticized this development, arguing that heavy credit card debt was negatively affecting families who were already struggling.  Deregulation proponents responded with the argument that financially constrained people were more than capable of managing the new, copious amounts of credit being offered, thank you very much. But we all may have missed one important point.  It was really the banks we should have been saving from themselves all along.

Comments

[lmclark]

I know a bankruptcy lawyer whose wife has a small horse. The horse got a credit card. They used the credit card to buy the horse's feed and other stuff. True story. Of course, the horse didn't pay the bill (what did it have to offer?).

[Patches]

lol..... I love that... a horse! Were the owners co-signers?

[Dan Ray]

I'm inspired by the credit card horse comment.
It reminded me of the theme song for the '50s TV comedy, "Mr. Ed."
For you youngsters, here's what it sounded like:
http://www.youtube.com/watch?v=Z2AlIhBFtLo

A horse is a horse, of course of course
and horses can't borrow a dime of course
unless the laws and rules are porous
and banks don't use their heads!

Of course there is not a single horse
Who can by a hoofprint a check endorse.
Will Congress put a law in force,
or leave it to the Fed?

(chorus)
Whiskers, paws and cloven hooves
can qualify today
for credit cards regardless of
ability to pay

Indebtedness we should avoid, of course
Because it will leave you with no recourse
except to live with great remorse
And debt that's overhead.

[Tim McCarthy]

Seems like a reasonable trend. I was reading in the book Bankruptcy 301 (http://www.bankruptcy301.com) that there's a high correlation between high income and high expenses, so if you think about it, the people who make a decent living (like me until I was laid off) need to lever up often. It takes money to make money. Furthermore, if you have high income, you are likely in one of those careers where you have bouts of unemployment, and if the bout is long enough you could get caught needing to file for bankruptcy. That's the situation I'm in.

[Aussie]

True, banks should have been able to save themselves if they were more strict in approving credit card applicants and grant the approval to those who have the financial capability to pay debt and bills. They should have also enforced necessary measures to help credit card holders who are already struggling in paying their bills and debt because of various reasons due to the recession, i.e. laid off from work.