What is the next economic crisis?

Posted by Mike Erney, October 13, 2010

First, the housing market crumbles, and then the stock market. Now there are growing fears of yet another collapse on the horizon, the credit card industry.

Wait- isn’t consumer debt declining? The trend of consumers paying off credit card debt seen since last year continued this quarter according to the Federal Reserve Board. Revolving consumer credit fell at an annual rate of 7.5 percent in August (Consumer Credit Card News). This matches the same numbers for June and July.

In all, revolving credit fell from $828 billion in July to $821 billion in August. Overall consumer debt declined almost 2% between these two months. (source: Consumer Credit Card News)

Doesn’t this all sound like a good thing? Not so fast. Most analysts have been quick to point out that the large decline is actually tied to charge offs, which are accounts lenders have written off as uncollectible.

The net charge-off rate — the value of uncollected credit card balances a bank writes off as a loss — could hit 10 percent by the end of 2010, double the yearly default average over the last decade. Total charge-offs may reach $28 billion during the third quarter of 2010, and just under $100 billion by the end of next year. (source:CNNMoney.com)

Not only would a credit card collapse wreak havoc on the nation’s credit card companies, it would put even greater strain on an already floundering financial sector in which weakened financial companies are at the root of the problem.

Many of our clients have begun to take action. Banks, credit unions, and other financial institutions are hiring key employees in Collections, Recovery, and Loss Mitigation. Investing in early & middle stage ARM will help prevent such a large increase in charge offs. There is still time if you put the right people in place.

What is really in store for the credit card industry? Only time will tell.

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