Bucking the Trend: The Rate of Credit Card Charge-Offs Is Expected to Outpace the Unemployment Rate in This Recession Skip to main content

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Bucking the Trend: The Rate of Credit Card Charge-Offs Is Expected to Outpace the Unemployment Rate in This Recession


Most recessions are punctuated by spikes in the rate of unemployment and the rate of credit card debt charge-offs. In that sense, this recession is no different. The unemployment rate is steadily on the rise. It's now hovering at 8.9 percent, as another 539,000 jobs disappeared in the month of April alone. Many economists predict the rate to hit -“ or exceed -“ 10 percent before it's all said and done. And, these figures say nothing of the millions of Americans struggling with other hard-hitting employment-related ails short of an outright job loss: pay cuts, higher employee contributions to health insurance premiums, and retirement plans in jeopardy.

At the same time, the rate at which banks are charging off bad credit card debt is soaring. In 2008, banks wrote off an average of 6.3 percent of their credit card balances -“ to the tune of $45 billion. As high as this is, economists expect dramatically higher charge-off rates over the next couple of years. For example, Chase Card Services charged off 7.7 percent of its credit card balances in the first quarter of this year. American Express, Bank of America, and Capital One charged off about 8.5 percent of their balances. Citigroup wiped out a whopping 10.2 percent.

And, this appears to be just the beginning of the charge-off frenzy. Bank "stress tests- released last week indicate that the 19 largest U.S. banks will wipe out a combined total of almost $84 billion by the end of 2010. This estimate is actually on the conservative end. Others figure this total could reach $141.5 billion, and $186 billion for the entire credit card industry. If the unemployment rate hits 10 percent or more, American Express and Capital One are expected to charge-off 20 percent of their credit card balances over this year and next; Bank of America, Citigroup, and JP Morgan Chase will likely wipe out 23 percent of their balances during this period.

These figures are what make this recession different: In past recessions, the rate of unemployment and the rate of credit card charge-offs have closely tracked one another. In other words, the jobless rate said a lot about the level of charge-offs one could expect to see during a recession. But with the direction this recession is heading, the rate of charge-offs will outpace the rate of unemployment, and by a significant margin. The reason for this difference? For starters, the crash of the housing market. In past recessions, those who lost their jobs had the option of taking out home equity loans to weather the storm. With plummeting home prices and banks pulling in the reins of available credit, that's not an option for most people these days. Consumer confidence levels are also at record lows, as people hold on to what they have and wait for another day to buy that new car or home.

These conditions come at a bad time for those dealing with job losses, pay cuts, and the like. In fact, right now the average American household is carrying an average of nearly $8,400 in credit card debt. With few alternative sources of income available in the tightening credit market, millions more Americans will run into financial trouble over the next couple of years. Fortunately, there is another alternative: Bankruptcy can wipe out unmanageable credit card debts. If you're in this situation, call a bankruptcy attorney today and learn how you can make a fresh start.

In North Carolina, contact The Law Offices of John T. Orcutt, with convenient office locations in Raleigh, Durham, Fayetteville, and Wilson.

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