http://www.walletpop.com/blog/2009/10/21/delinquency-rates-increasing-on-credit-cards/http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#topofpagehttp://www.indexcreditcards.com/credit-card-rates-monitor/Well let's see if we can figure out what they are thinking.....
Code:
Citibank
92,000,000 consumers
102,540,000,000 credit outstanding
0.055 overdue percentage
86940000 remaining consumers
5,060,000 consumers overdue
$1,114.57 average balance
$5,639,700,000 exposure due to overdue consumers
50,600,000 consumers that do not pay off balance
$1,114.57 Average balance
$56,397,000,000 Total charges outstanding
0.1539 Interest Rate
$8,679,498,300 Annual Interest Income
50,600,000 consumers that do not pay off balance
$111.46 amount that needs to be extracted from each consumer
0.100 Additional interest needed to extract that amount from each consumer
0.254 New annual interest rate
You figure that 5% of your consumers are over 30 days overdue, and are going to leave you holding the bag for something on the order of $5B......
You only made about $8B per year in interest on the remaining customers, since, on average 45% of the credit card holders carry "zero" balance....
So you have to extract that money from the remaining consumers, either by fees, or by raising the interest rate you charge......
And although you love all consumers, because of the charges you can extract from retailers when they use your card, you would really like to increase the number of people over which you can spread that $5B, or at the very least, reduce the number of consumers that you have that, for example, just keep their credit cards around for emergencies, because that costs you overhead, but does not bring in any income.... So that is why a lot of people who carry small balances are being dumped, or alternately, some annual fee is now being charged for administration....or, why if you live in one of the counties on here that are in blue, you and your neighbors could have a significantly higher risk of being a defaulter.... County of residence is often a pretty good predictor....
http://data.newyorkfed.org/creditconditions/The other alternative, of course, is for them to just increase their interest rates. In order to make up for that five percent delinquencies, per the above calculation, they need to charge their non-balance paying consumers an additional 10% per year, which would bring the average credit card interest rate up to about 25%.
I don't know if you have been catching the "credit revolt" chick on any of the TV shows:
http://www.huffingtonpost.com/2009/10/26/ann-minch-to-chase-bank-a_n_333625.htmlbut she is complaining about Bank of America increasing her interest rate up to 30% which caused a national outcry and caused her to be practically a celebrity:
Here's the calculation for Bank of America:
Code:
Bank of America
80,200,000 consumers
150,000,000,000 credit outstanding
0.0753 overdue percentage
74160940 remaining consumers
6,039,060 consumers overdue
$1,870.32 average balance
$11,295,000,000 exposure due to overdue consumers
44,110,000 consumers that do not pay off balance
$1,870.32 Average balance
$82,500,000,000 Total charges outstanding
0.1539 Interest Rate
$12,696,750,000 Annual Interest Income
44,110,000 consumers that do not pay off balance
$256.06 amount that needs to be extracted from each consumer
0.137 Additional interest needed to extract that amount from each consumer
0.291 annual interest rate
The 30% interest rate that people are talking about is almost exactly the amount it would take to recover that $11B or so that their higher-than-average 7.5% delinquency rate is causing them to have to write off!
So it is pretty simple and the numbers roughly work out, provided some of our simplifying assumptions are pretty close to correct.
By their calculation that 5-7% (and growing) percent of people that are overdue will not pay their balance back.....So, in order to make that money up, they will use a variety of ways, including fees, late charges, administration fees, paper billing fees, electronic billing fees and any of a dozen things to try to raise some money.
Can you see that when the percentage gets to be some level, like right about now, the whole system will implode? People will tear up their cards, no longer put on balances, and there will be no way for the credit card people to extract that money. The credit card business will no longer be profitable at these levels of delinquency, particularly if even more consumers refuse to pay off their balance. At some point point, someone will do they should have done long ago, which is what they used to do back in the 70's before deregulation, which is to scale down their entire business and only give credit to people who are credit-worthy! Can you imagine?
At that point, the credit-card fueled consumer economy will grind to the screeching halt that Kunstler has been rooting for, and people will have to start living within their means, whatever that may be.
Here, by the way, is a link to the excellent Frontline show on the origin of all of this stuff....including the practice of locating the businesses in states that allow the instant increase of consumer rates without notice on the whim of the company....
http://www.pbs.org/wgbh/pages/frontline/shows/credit/eight/By the way, I should add..... If the delinquency rate goes up to 10%, B of A will have to raise their interest rate to 33% to break even. And, at 19% delinquencies, the rate will be 50%, so you can see the brick wall point is actually pretty close to where we are right now...
Login
Register
News
Discussions
Resources
Members
