Credit Card Debt Swamps Banks Loan Losses Exceed Jobless Rate For First Time In History

At supermarkets, gas stations, doctors’ offices and department stores, Americans have gone on an unprecedented borrowing binge, using their plastic to buy now and pay later with double-digit interest.

From 1993 through 1996, consumers doubled their credit card debt. They now owe their banks half a trillion dollars.

And more and more, they aren’t paying those banks back.

After years of spectacular profits, banks that specialize in credit cards now find themselves facing higher funding and marketing costs - plus a record surge in bad loans that has cut into lenders’ earnings.

“The chickens are coming home to roost,” said Charles M. Vincent, vice president for equity research at PNC Bank Corp. and a longtime card industry skeptic.

“Follow the money,” Vincent said. When any financial business shows spectacular growth, “that’s a sure sign for problems later.”

As many as one-third of the nation’s 100 million credit card users pay off their balances every month. But a majority take months or years to settle accounts, incurring the finance charges that create most of the industry’s profit.

Banks are accustomed to higher loan losses during recessions. But the recent trend has taken them by surprise, coming at a time when the nation’s economy is growing and personal incomes are rising.

“It’s the first time we’ve seen loss rates exceed the rate of unemployment. This is historic,” said Alex W. “Pete” Hart, the former MasterCard chief executive who now runs Advanta Corp., one of the 10 largest U.S. credit card issuers.

Advanta, based in Spring House, Pa., ended a decade of rising profits with a $19 million first-quarter loss that halved its own stock price and sent those of other card issuers tumbling.

Advanta’s troubles are echoed at other, larger lenders. Government banking reports show that, in 1993, the major card companies were earning roughly $4 for every $100 they lent - even after writing off another $4 in uncollected loans.

Last year the banks earned less than $2 for every $100 lent - while writing off close to $6 as uncollectable.

The trend worries federal bank regulators. The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have taken the unusual step of ordering special examinations of credit card issuing to forestall a potential bank crisis.

To be sure, the credit card boom of the mid-‘90s has produced little to compare with the massive losses that punctured the U.S. real estate loan bubble or the savings and loan crisis of the late 1980s.

Credit card bankers insist their business will rebound. At its shareholder meeting, Advanta Chairman Dennis Alter said he was imposing higher finance charges and tougher credit rules to shore up earnings.

Advanta competitors First USA and Wilmington, Del.-based MBNA Corp. also say they have losses under control.

But industry observers - especially the hard-to-please experts who staff the nation’s bond-rating agencies - aren’t so sure.

“It’s going to get worse,” said Helene Moehlman, senior director for financial institutions at Fitch Investors Service, which has down-graded a series of credit card bank securities this year. “There are no signs of it leveling off.”

Card bankers are losing the ability to predict problem loans, she said. With consumer bankruptcies rising to a record 1.1 million last year - and running ahead of that pace this year - “more and more borrowers are stopping payment and declaring bankruptcy” without the traditional period of slow payments that traditionally alert lenders to future trouble, she said.

Research by the American Bankers Association shows more and more of the losses are being generated by the biggest borrowers, said spokeswoman Nancy Ness Judy.

Because big borrowers pay the biggest finance charges, “your most profitable customers are the ones most apt to go bankrupt,” said W. Todd Isom, credit card bond analyst at the Duff & Phelps rating agency in Chicago.

But Advanta’s Hart denies the wave of bankruptcies is much of a factor. At his company, more than 9 out of 10 bankruptcies follow months of late payments, he said.

Overall, the American Bankers Association shows nearly 4 percent of the nation’s bank card borrowers aren’t paying their loans - a sharp rise from the 2 to 3 percent levels of most of the 1980s and early 1990s. These “charged-off “customers borrow more than average; their debt accounts for 5.45 percent of the industry total.

And that doesn’t include the one-third of all credit card loans that have been sold to investors, or “securitized.” Those older loans are more likely to go bad than the loans the Bankers Association measures, according to Fitch.

Combining data from the Bankers Association and Fitch, banks were charging off bad loans at an annual rate of nearly 6 percent in recent months - the highest level since both agencies began keeping track.