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Wednesday, September 28, 2005 5:31 PM

Credit Card Delinquencies

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The Associated press is reporting Overdue Credit Card Bills Hit Record High.
The scapegoat du jour is of course "high gas prices". Let's take a look:

High Gasoline Prices Blamed for Record-High Past-Due Credit Card Payments in Second Quarter

Charge it! That familiar refrain is producing an unwanted response for more Americans: Your bill is overdue! Surging energy prices, low personal savings and the higher cost of borrowing have combined to produce a record level of overdue credit card bills.
The American Bankers Association reported Wednesday that the percentage of credit card accounts 30 or more days past due climbed to an all-time high of 4.81 percent in the April-to-June period. It could grow in the months ahead, experts said.
The previous high of 4.76 percent came during the first three months of the year, in keeping with a generally steady rise over the past several years.

"The last two quarters have not been pretty," said Jim Chessen, the association's chief economist. "The rise in gas prices is really stretching budgets to the breaking point for some people," Chessen said. "Gas prices are taking huge chunks out of wallets, leaving some individuals with little left to meet their financial obligations."
Notice the period in question is from April to June. Without a doubt we are talking pre-Katrina and pre-Rita. When delinquencies from the hurricanes hit in the 4th quarter, it will not be a pretty sight at all.

Right now I am willing to guess that this rise in delinquencies is precursor to a huge impending jump in bankruptcy filings. The new bankruptcy reform act goes into affect in October and those who were sitting on the fence may now have decided to just get it done while they can. Anyone making that decision may as well stop paying all bills right here, right now.

Mish, what about the new minimum payment standards?
That's a good question so let's take a look at that too.

In accordance with a new Fed ruling that requires banks to adjust Minimum Payments to allow loan repayment in a "reasonable" period of time, MBNA (which will be part of Bank of America by the end of the year) is changing their Minimum Payment calculation As of December 1, 2005, from: $15, plus all interest and fees, ---- to 1% of the Balance, plus all interest and fees.

-> With a Balance of $25,000 at 10% interest --- the Minimum Payment rises 342% from $97.19 to $332.19.

-> With a Balance of $25,000 at 20% interest --- the Minimum Payment rises 231% from $179.38 to $414.38.

The new "reasonable" 100 month repayment period based on 1% per month is considerably shorter than the current repayment period that can take something like forever.

Mish tips his hat to Elroy on Silicon Investor for providing the above MNBA examples.

Let's backtrack for a second. Delinquencies are close to 5% which means that people can not even come up with a measly $15 + interest. Not that 1% is any great shakes but it sure seems to be a lot of extra dough for some that are struggling now. What happens when the minimum pay is a more reasonable 4% of the balance, plus interest, plus late fees? The rising numbers do not even include "hurricane stress". What happens after Katrina and after Rita? Millions of people were affected and hundreds of thousands are without jobs.

Rising delinquencies are a "flashing yellow light that we need to watch" said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group.

I have a question for Ms. Reaser: Are you just going to watch them rise or are you going to do anything about it? If so, what?

Mike Shedlock / Mish

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