Hold On To Your Hats And Sunglasses, Here Comes The Credit Card Meltdown

We hope you’re enjoying our current economic roller coaster because it’s likely to continue — According to a new report from research firm Innovest Strategic Value Advisors, titled “Credit Cards at the Tipping Point,” the fun has only just begun. As the credit crunch begins to affect consumers, they’re going to have more difficulty paying their credit card bills. The report suggests that credit card companies’ misleading practices and cavalier extension of credit may come back to bite them. Who should be worried? Capital One.

From The Red Tape Chronicles:

The report by the research firm Innovest Strategic Value Advisors, titled “Credit Cards at the Tipping Point,” predicts that fallout from the credit crunch will lead to a sharp increase in credit card defaults in the coming year, making $1 out of every $10 owed on credit cards impossible to collect. That will force banks to write off nearly $100 billion in credit card debt, it said.

“A long build-up in consumer indebtedness, deteriorating economic conditions and a potential ‘sudden stop’ in credit availability could cause charge-offs to rise dramatically into 2009,” the report says.

Misleading practices by credit card issuers will come back to bite them, say report author Gregory Larkin and Laura Nishikawa, as uninformed consumers who wind up facing surprise interest rate hikes and fees will be more likely to default on their loans. The report concludes that Capital One is most at risk, due in part to its aggressive marketing and “fee-trapping” strategies.

“The data points to an unsustainable business model based on penalty pricing, and the company is worst-in-class by Innovest standards,” the report said.

Some more troubling details from the Red Tape Chronicles:

  • Outstanding credit card debt has grown by more than 75 percent since 1999.

  • More than 50 percent of Capital One’s cards are “low-limit” cards, which Innovest said are designed as fee traps — consumers with low limits are more likely to surpass those limits and face penalty charges. (CEO Fairbank maintains that low-limit cards are simply a smart way to manage risk)
  • Risky borrowers with low credit scores — subprime borrowers — account for roughly 30% of outstanding credit-card debt.

The good news? The credit card market is tiny compared to the housing market, so a “subprime credit card meltdown” wouldn’t have the same effect as our current housing dilemma.

CREDIT CARDS AT THE TIPPING POINT? [Red Tape Chronicles] (Thanks, Doug!)