Wednesday, November 7, 2007

Credit Card Debt a $915 Billion Disaster-in-Waiting for Banks

Think the estimated subprime debt load carried by the big international banks is big, at $1 trillion?

How about this: Americans now owe nearly as much - a record $915 billion - on their credit cards alone.

And defaults and delinquencies in the credit card sector are piling up, which means big banks are on the hook, again. More sand in the gears for the global economy.

Credit card companies wrote off 4.58 percent in payments between January and May, almost a third more than in the same period in 2006, according to Moody's Investors Service. As a result, lenders such as Citigroup, Bank of America, and American Express, among others already reeling from the subprime mortgage disaster, are being further weakened.

Not to mention the staggering U.S. economy, which is so dependent on a vigorous consumer credit sector to keep it healthy. Seventy-two percent of the U.S. economy rides on consumption alone.

Fears are now rising that U.S. consumer credit card problems could ripple out into the global credit market, starting in Europe. Deutsche Bank, for example, is now "in a heightened state of alert to monitor a potential domino effect," says the bank's U.S. analyst, Michael Mayo.

In the U.K., homeowners are reportedly using their credit cards for mortgage payments. Credit card interest typically runs much higher than mortgage rates, so reducing one debt by increasing another at a higher rate can be the first step on the road to default and eventual bankruptcy.

The U.K, usually 18 months ahead of the U.S. in its credit cycle, is perhaps a harbinger of things to come in the U.S. credit picture.


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