Fitch Ratings: credit card picture will worsen

Now is a bad time to be a credit card issuer, and times are only going to get tougher.

That sobering conclusion comes courtesy of global credit rating agency Fitch Ratings, which recently released a study that looked at asset quality among major United States credit card issuers, including American Express, Capital One, Citi and Discover.

"The deterioration in credit cards is accelerating faster than many had expected," Fitch analyst Christopher Wolfe told the Wall Street Journal. "The message we are trying to deliver is that things are going to get worse before they get better. Thus far, credit card businesses have been profitable, but that could change." Wolfe is one of the authors of the Fitch report on credit card issuers.  

Trouble for cardholders
Credit cardholders are having trouble making payments. Charge-offs -- the value of uncollected credit card balances removed from the books and charged against a bank's loss reserves -- and delinquencies climbed in the fourth quarter of 2007 and continue to worsen this year, Fitch says. That's because already strapped consumers are dealing with a triple threat in the form of falling home prices, increasing unemployment and higher energy costs. With limited access to options like home equity loans and cash-out mortgage refinancing, Fitch predicts that more consumers will turn to revolving credit, the bulk of which is made up of credit cards.   

What's an issuer to do? 
Fitch sees tough times continuing through 2008 and possibly into 2009, but credit card issuers may be able to mitigate the pain. "The degree of deterioration will be dependent upon the duration and severity of an economic downturn and an issuer's ability to manage portfolio growth, control exposure to unused credit lines, and collect delinquent accounts," Fitch says. Issuers have already begun controlling growth by limiting attractive introductory rates and pricing, adjusting fee structures, carefully managing credit lines and using richer reward programs to maintain customers and encourage on-time payments.

Looking ahead, Fitch sees prime charge-off rates advancing to at least 7 percent by the end of this year, up from 6.4 percent in May. 

Fewer bankruptcies mean more delinquencies
Fitch predicts that delinquencies could increase this year, partially due to the fact that following a 2005 legislative change, it's become harder for consumers to file for bankruptcy. "Issuers have historically charged-off bankrupt accounts upon notification, while delinquent accounts are not charged-off until they become 180 days or more past due," Fitch says. "Now struggling consumers, who would have filed for bankruptcy historically, must roll through the delinquency buckets before being charged-off."

See related: Key provisions of the 2005 bankruptcy law, Card issuers' bad earnings reshape credit card offers, Gas prices take toll on family visits, American Bankers Association reports increased card delinquencies

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Brazil has been on my list of places to visit for some time. While I may not get to samba in Rio just yet, for now I can enjoy being a part of the Carnival of 20-Something Finances, Brazil-Carnival Style! My blog post "FICO discounts credit monitoring by 25 percent" is included in the latest carnival round-up, hosted by Dollar Frugal. The advice provided by my fellow bloggers could help you save some reais.