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Mortgage mess mostly misses credit cardholders -- so far

By John Egan

Credit cardholders of America, keep your antacids handy.

credit cards have been spared -- so farCardholders, particularly those with tarnished credit records, may experience indigestion as financial services companies chew on the effects of the subprime mortgage chaos. That indigestion could come in the form of higher interest rates, stiffer late-payment penalties and tougher lending standards.

So far, though, credit card issuers have barely budged amid the subprime meltdown. They say they've been only mildly affected, if at all, by the mortgage woes.

Subprime spillover to credit cards limited
"Despite some pockets of stress, our consumer credit portfolio is holding up well," says Liam McGee, president of global consumer and small business banking at Bank of America Corp.

But as defaults on mortgages continue to rise, financially troubled homeowners will slide backward in paying credit card bills or load up their cards with even more debt to cover everyday cases, some experts predict.

"It's going to be tough, but people have to bite the bullet and prepare for the worst. They don't want to be caught in the crosshairs of the credit crunch," says Howard Dvorkin, founder and president of Consolidated Credit Counseling Services, a nonprofit debt management organization.

Mark Zandi, chief economist at Moody's Economy.com, says he's seen a "very modest spillover" of the subprime collapse into the credit card market. That spillover will continue throughout 2008, as it will take that long for the mortgage mess to peak, he predicts. Carl Steidtmann, chief economist at Deloitte Research, forecasts that the credit squeeze will linger at least through the end of this year.

"I don't think there's any question that it's going to get worse before it gets better," says Andrew Housser, co-CEO of Bills.com.

Card issuers on 'high alert'
Although the spillover is modest, Zandi says credit card issuers are on "high alert" and are poised to hike interest rates, pull back on credit lines or bump up late-payment fees if borrowers display any signs of distress. That distress is most likely to be felt in states being hammered by the subprime mess, including Arizona, California, Florida, Michigan, Nevada and Ohio, experts say.

Nonetheless, Diane Swonk, chief economist at Mesirow Financial, says she envisions little additional tightening of standards in the credit card market. "The credit card industry was ahead of the mortgage industry in dealing with poor credit quality," Swonk says.

While Cynthia Ullrich, senior director in the credit card group at Fitch Ratings, agrees that the subprime effect on the credit card business has been limited so far, she foresees credit card delinquencies rising from what had been historic lows. Fitch Ratings says in a Sept. 6 report that even though "fears of subprime contagion persist," it expects only a "modest deterioration" in the consumer lending market.

Card issuers mostly quiet
Jamie Dimon, chairman, president and CEO of JPMorgan Chase & Co., told financial analysts in mid-July that his company was "slowly de-emphasizing" teaser rates and balance transfers for credit cards. Citing a projected increase in personal bankruptcies, Dimon said write-offs of bad debt in its credit card business are expected to be higher in 2008 than in 2007.

JPMorgan's credit card competitors are largely tight-lipped about how they're reacting to the subprime crisis.

Deloitte Research's Steidtmann sums up the banks' relative silence this way: "Some of it is competitive intelligence, and they certainly don't want to tip their hands to their competitors as to what they're doing."

Spokeswoman Julie Rakes says Capital One Financial Corp. hasn't been prompted yet to modify its lending criteria.

"Capital One has always been resilient and appropriately conservative in our underwriting standards. Credit continues to perform as expected, but we're, of course, keeping a close eye on the environment," Rakes says.

At HSBC Finance Corp., spokeswoman Cindy Savio says the company regularly fine-tunes credit criteria based on the performance of the economy and other factors. She declines to say whether HSBC has altered its lending standards.

Discover Financial Services LLC says it hasn't changed any of its business practices -- such as requiring higher credit scores or tweaking its marketing -- as a result of the subprime mess. In fact, Discover says it hasn't seen any "meaningful deterioration" from the over-30-day delinquency rate of 2.97 percent that it reported for March through May.

Indeed, a Sept. 5 report from the Federal Reserve noted that credit availability and quality remains good for most American consumers. The assessment was based on a nationwide survey of loan officers. However, an August report from Fitch Ratings showed year-over-year credit card delinquencies inching up slightly in June, with credit card payment rates declining by a slim amount.

In July, outstanding U.S. credit card debt rose to $907.4 billion, its highest level in at least five years, according to a Federal Reserve report released Sept. 10. Standard credit card interest rates are hovering around 13.5 percent to 14.5 percent, according to CreditCards.com's weekly rates surveys.

Testifying in June on Capitol Hill, U.S. Rep. Carolyn Maloney, D-N.Y., noted that among U.S. households carrying credit balances, the average debt load exceeds $13,000. The congresswoman warned of a "perfect storm" surge in consumer debt as Americans realize they no longer can refinance their homes to pay off credit cards and other debt.

Bills.com's Housser expects credit card delinquencies and bankruptcies to spike, as the refinance and home equity safety net has all but disappeared.

Dvorkin, the executive at Consolidated Credit Counseling Services, laments: "I don't think we're going to have an easy ride."

What should credit cardholders do?
Cardholders should pay close attention to their monthly statements, because if changes occur, they can be sudden: Under federal law, card issuers can change credit terms with as little as 15 days' notice.

For tips on making sure the subprime mortgage mess doesn't affect you, please see the CreditCards.com story "9 ways to avoid subprime problems."

To comment on this story, write Editors@CreditCards.com.

More credit card news.

Published: September 14, 2007


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