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Card delinquencies catch up to Cap One

Jeremy Simon

It looks like the subprime mortgage debacle has begun to spill over to credit cards, with issuer Capital One slashing its earnings outlook amid rising credit card delinquencies.

Capital One lowered its profit forecast for both the fourth quarter and full year as it was forced to set aside money to cover delinquent credit card accounts. As Capital One explained, “The reduction in expected earnings per share was driven primarily by increased provision expense and additional legal reserves established in the fourth quarter.”

The credit card issuer said its fourth-quarter loan loss provision totaled approximately $1.9 billion, made up of around $1.3 billion in charge-offs and an allowance build totaling about $650 million which “reflects fourth quarter delinquencies in the company’s national consumer lending businesses” — in other words, credit cards.

“Capital One writes off bad loans after six months, meaning many of the loans that were in trouble this summer now are seen as even less likely to be repaid,” The Wall Street Journal said.

Cap One’s announcement seems to confirm the argument that consumers turned to credit cards as borrowing against their homes was no longer an option.

As the earnings season gets under way, this announcement from a major credit card issuer like Capital One means Wall Street will be anxious to see if more banks fell victim to consumers who were unable to repay their credit card bills.

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