What credit-card payoff? Consumers are dumping debt

[flyinbroke]

Steep drops in credit-card balances driven by companies charging off bad debt


March 8, 2010

CHICAGO (MarketWatch) -- Credit-card debt has been falling for 16 straight months but consumers aren't paying off their financial obligations as much you might think. Instead, they're walking away from the debt, forcing credit-card issuers to write off as much as 90% of that reported drop, according to a new report by CardHub.com.

U.S. banks charged off a record $83.3 billion in credit-card losses last year. That makes up the bulk of the $93.2 billion drop in outstanding credit-card debt that was reported by the Federal Reserve for 2009.

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"The reduction in credit-card debt is not because consumers have found a bag of cash under their mattresses and are now paying down their debt," said Odysseas Papadimitriou, chief executive of CardHub.com.

Papadimitriou drilled down into the Federal Reserve data detailing the declining consumer-debt levels. While the numbers painted a picture of frugality and fiscal conservatism, Papadimitriou was baffled, considering the high numbers of cash-strapped consumers and the now 9.7% jobless rate.

"When consumers are paying off more than they usually do, that's a time of financial health," he said.

What Papadimitriou found was this: Last year, outstanding credit-card debt dropped an eye-popping $93.2 billion to about $876 billion, according to Federal Reserve data, which are not seasonally adjusted. During the same period, charge-offs -- the unsecured debt the banks determine they won't get back and charge off to loss reserves -- added up to $83.3 billion.

In other words, only about $10 billion of the drop is attributable to consumers paying off their debt.

Robert Hammer, chief executive of investment bank R.K. Hammer, said when credit charge-offs are exceeding receivables, the impact is clear.

"For the first time in my 30 years in this business, the dollar amount of card loans finished the year lower than they started," he said. "That would mean that consumers have either put their credit cards in a safe-deposit box and only get them out for special occasions or that some are cutting them up and not using them at all. And we don't think any of that is going on."

Consider some of January's results, the most recent available. Capital One's charge-off rate climbed to 10.41%, above December's 10.14%. In 2005, Capital One's charge-offs shot up similarly with a rash of bankruptcy filings ahead of tighter federal laws.

Overall credit-card charge-offs as charted by Moody's Credit Card Index shot up to 11.15% in January, compared with 10.32% in December. Moody's expects charge-offs to peak at close to 12% over the next several months, eclipsing an all-time high of 11.5% in August.

If there is a silver lining, it's that there are some signs that the rate of late payments -- those 30 days past due -- is starting to slow. Bank of America, the largest U.S. lender, reported that 7.35% of accounts were past due in January, the lowest level in a year.

"In the coming months we'll see clearly if consumers have learned their lessons in lowering their debt levels," Papadimitriou said.

http://www.marketwatch.com/story/write-offs-are-driving-decline-in-credit-card-debt-2010-03-09

[momisery]

All I can say is being frugal may help you save and pay bills, but when the storm comes in for you you have to spend that. Once it is gone and your without a good paying job being frugal has nothing to do with paying your bills then, you simply can't pay them. There is no way they can accept our wage drops for the last few decades, continue to out source our jobs for cheaper wages and expect us to afford to purchase anything other than bare necessities. Housing has to fall as wages have, food went up with the gas crisis and stayed up and I am sure this summer it will go up again saying it is because of gas. Which is a lie since they never lowered it from the last crisis. For decades they have blamed increases in wages for increased prices, most people have lost income and gain credit. But business has managed to continue to increase prices and not drop them back to 1980 wages because they think they can. The truth will be in the end of this mess.. if we turn around it will be a long time before people trust again if they ever do. Why pay taxes when we bail business out with our tax dollars?

[Flamingo]

What is scarey to me is who pays for all of that dumped debt? In the long run, we all do with increased taxes, fees, service charges, higher prices, etc., etc.

I also laugh when they state the unemployment rate is at a certain percentage; all those off the unemployment roles who cannot receive any more benefits and are still unemployed are not counted so add about another 8% to the figure given.

[flyinbroke]

What is scarey to me is who pays for all of that dumped debt? In the long run, we all do with increased taxes, fees, service charges, higher prices, etc., etc.

I also laugh when they state the unemployment rate is at a certain percentage; all those off the unemployment roles who cannot receive any more benefits and are still unemployed are not counted so add about another 8% to the figure given.

True. This does not account for the unemployeds who do not qualify for unemployment (this was me), those whose bennies ran out, and those with advanced degrees manning cash registers in Wally World (part time, so WalMart doesn't have to pay bennies.) A conservative estimate is that unemployment is at least twice this number.

As for the dumped debt, it seems to be far more lucrative for the banks to dump it rather than settle, negotiate, or work with consumers. I suspect many are pulling the chargeoff trigger as quickly as possible, as soon as legally allowed. They get a massive tax writeoff (aka credit), pay less taxes, and this frees up more cashola for those huge bonuses they still *somehow* managed to pay out.

[fltoo]

What is scarey to me is who pays for all of that dumped debt? In the long run, we all do with increased taxes, fees, service charges, higher prices, etc., etc.

I also laugh when they state the unemployment rate is at a certain percentage; all those off the unemployment roles who cannot receive any more benefits and are still unemployed are not counted so add about another 8% to the figure given.

Hi, I stop in once in awhile to check the credit rebuilding threads. Always great info here in the forum.

I see a lot of posts about how people not getting benefits are not counted in the unemployment number and wanted to clear up a popular misconception about how unemployment is tracked by the government.

Believe it or not, the percentage is derived by survey of households. Has nothing to do with who is collecting benefits or who stopped looking for work.

The percentage is quite reliable as far as the sampling goes.

[flyinbroke]

Reliable because they are unlikely to be surveying everyone to find out their employment status.

I still say it is twice what they are advertising...even here, where the job market is supposedly better, there are a lot of people out of work.

[keptdigging]

Banks borrow at 1/4 to 3% (right now it's 1/4... 1/4 of 1%!) and lend it back out at 18-24%. Plus all those fees. Charging off 5-10% is just a cost of doing business. Who pays for it? People who carry credit card balances. Oh and some of them package credit card accounts into investments sold on wall street. In which case, investors who knew what they were buying bear the risk of loss (if they wanted safety, the should have bought something else.)

In fact, a lot of these "toxic" asset investments are not so toxic (if 10% default that means 90% are paying in full) and some investors made good money buying these things for pennies at the height of the panic. Just like some JDB may buy your paper for cents on the dollar and make out really well when you settle at 20%...

[Flamingo]

Hi, I stop in once in awhile to check the credit rebuilding threads. Always great info here in the forum.

I see a lot of posts about how people not getting benefits are not counted in the unemployment number and wanted to clear up a popular misconception about how unemployment is tracked by the government.

Believe it or not, the percentage is derived by survey of households. Has nothing to do with who is collecting benefits or who stopped looking for work.

The percentage is quite reliable as far as the sampling goes.

It was on the news just a few days ago that the percentage is calculated by the number of unemployment claims filed for a specific period (i.e. one month)l in each state. Long-term unemployed who have used up all their unemployment benefits and have given up looking for a job, referred to as "discouraged workers" are not counted because they are considered not to be part of the labor force. It was mentioned that the actual unemployment figure for 12/09 was about 22.1%.

[fltoo]

It is actually calculated by survey in the last 70 years. I will try to find an explanation of it and post it for you. Might be on some government site.

[fltoo]

Early each month, the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor announces the total number of employed and unemployed persons in the United States for the previous month, along with many characteristics of such persons. These figures, particularly the unemployment rate—which tells you the percent of the labor force that is unemployed—receive wide coverage in the media.

Some people think that to get these figures on unemployment, the Government uses the number of persons filing claims for unemployment insurance (UI) benefits under State or Federal Government programs. But some people are still jobless when their benefits run out, and many more are not eligible at all or delay or never apply for benefits. So, quite clearly, UI information cannot be used as a source for complete information on the number of unemployed.

Other people think that the Government counts every unemployed person each month. To do this, every home in the country would have to be contacted—just as in the population census every 10 years. This procedure would cost way too much and take far too long. Besides, people would soon grow tired of having a census taker come to their homes every month, year after year, to ask about job-related activities.

Because unemployment insurance records relate only to persons who have applied for such benefits, and since it is impractical to actually count every unemployed person each month, the Government conducts a monthly sample survey called the Current Population Survey (CPS) to measure the extent of unemployment in the country. The CPS has been conducted in the United States every month since 1940, when it began as a Work Projects Administration project. It has been expanded and modified several times since then. For instance, beginning in 1994, the CPS estimates reflect the results of a major redesign of the survey. (For more information on the CPS redesign, see Chapter 1, "Labor Force Data Derived from the Current Population Survey," in the BLS Handbook of Methods.)

There are about 60,000 households in the sample for this survey. This translates into approximately 110,000 individuals, a large sample compared to public opinion surveys which usually cover fewer than 2,000 people. The CPS sample is selected so as to be representative of the entire population of the United States. In order to select the sample, all of the counties and county-equivalent cities in the country first are grouped into 2,025 geographic areas (sampling units). The Census Bureau then designs and selects a sample consisting of 824 of these geographic areas to represent each State and the District of Columbia.

the url is www.bls.gov. It is the Bureau of Labor and Statistics

Wow, I find it hard to believe the media would report something erroneous.

[WhatMoney]

fltoo is correct - It is the Household Survey that is used by the BLS for monthly unemployment data. The news reports are often misunderstood or misleading.

This link gives all the numbers:
http://stats.bls.gov/news.release/empsit.toc.htm

The unemployment rate quoted in the popular press only count those who have looked for work in the last 4 weeks as part of the unemployed workforce. This number was 9.71% for February.

If you include the discouraged workers and the marginally attached workers the unemployment rate is 11.15%.

If you include the above discouraged and marginally attached workers AND include everyone working part-time because they can't find a full-time job then the unemployment rate moves up to 16.79%.

The monthly BLS report is thorough, breaking down the unemployment numbers among different groups. See this table:

http://stats.bls.gov/news.release/empsit.a.htm

For example, February unemployment rate for those 25 yrs of age and older, in terms of education:

Less than a high school diploma:
15.6%
High school graduates, no college:
10.5%
Some college or associate degree:
8.0%
Bachelor's degree and higher:
5.0%

[helpmeout]

If you include the above discouraged and marginally attached workers AND include everyone working part-time because they can't find a full-time job then the unemployment rate moves up to 16.79%.

You can't include employed people in the unemployment rate. Even if it is only part-time, they are still employed. It would be deliberately misleading to count employed people as unemployed.

[WhatMoney]

You can't include employed people in the unemployment rate. Even if it is only part-time, they are still employed. It would be deliberately misleading to count employed people as unemployed.

Not true. I can define what is included in the unemployment report anyway I like. And in fact, the BLS breaks down those employed part-time only because of the poor job market as a separate number just for that purpose. There is nothing misleading about defining a term and providing the correct number for that definition.

The "partial unemployment rate" for part-time workers who want to work full-time was 5.73% in February, if that make you feels any better.

The point is the raw numbers are provided by the BLS every month. Anyone can calculate the unemployment rates any way they like. Some in this thread are disputing the 9.7% number as being too low. I just provided other ways of calculating unemployment that will give higher numbers.

[helpmeout]

Not true. I can define what is included in the unemployment report anyway I like.

Yes, you can. But that doesn't make it accurate. A person is employed even if it is part-time. Personally, I prefer to go with the true definition of unemployed over someone who seems to want to count employed people (even if it is only part-time because that is all they could find) as not working.

What they should have is an UNDERemployed rate (of course, we would have to figure out a way to not include the ones who are willfully underemployed). Because adding employed people to the UNemployment rate simply isn't accurate. And doesn't do much for your argument.

[WhatMoney]

Yes, you can. But that doesn't make it accurate. A person is employed even if it is part-time. Personally, I prefer to go with the true definition of unemployed over someone who seems to want to count employed people (even if it is only part-time because that is all they could find) as not working.

What they should have is an UNDERemployed rate (of course, we would have to figure out a way to not include the ones who are willfully underemployed). Because adding employed people to the UNemployment rate simply isn't accurate. And doesn't do much for your argument.

Oh please - what is your point? My definitions are quoted all the time in financial circles. No one in my industry has a problem describing more expansive definitions for unemployment, as long as the terms are defined.

There are in fact unemployment rates that also include the underemployed. If you include underemployed, partially employed, and all unemployed including discouraged workers, the "unemployment rate" is over well 20% today. You can find non-government reports that provide these estimates.

And BTW this is not my idea. I subscribe to private economic newsletters that describe the unemployment rate exactly as I did. These folks have been in the business for 60 years - and I've only been in the finance business for 30 years.