According to the debt research firm CreditSights, the number of credit card loans deemed uncollectible and delinquent has reached record levels. In March 2009, uncollectible and written-off accounts reached an 8.6% annual rate, compared to 5.3% a year earlier. Delinquent loans reached 6%.
The rise in uncollectible debt is tied to the unemployment rate, which reached 8.9% in April 2009. The credit card defaults could stifle attempts by the Federal Reserve to get credit flowing to consumers through the $1 trillion Term Asset-Backed Securities Loan Facility, which went into effect in March. And it is likely that the money that does flow to consumers will reach those who need it least.
The TALC program is meant to expand credit by providing money to investors buying bonds that are backed by mortgages, auto loans, and a variety of other debt. Credit card issuers rely upon the asset-backed market to free up their balance sheets and finance new lending, by packaging and selling credit card loans to trusts that turn them into bonds and sell them to investors.
Credit card lenders have reacted to mounting losses by closing unused accounts, pulling in credit lines, and raising fees and rates. Outstanding credit card debt has dropped by $21 billion since September 2008, due to a lack of desire to lend and reduced demand from consumers to borrow. Even so, the loan portfolios of the top six credit card issuers fell by only a 1.9% annual rate in the first quarter of 2009.
Even if unemployment rates level off as expected, charge-offs and delinquencies could continue to climb as many consumers deal with reduced incomes and breaks in income. Many consumers are also angered by reduced credit lines, increased fees and rates, and are increasingly turning to bankruptcy protection to free themselves from credit card debt.