job losses had a “ripple effect” on the credit card business, as even consumers who still had jobs adjusted how often and how much they spent

TO BE NOTED: From the FT:

"Capital One card loss rates hits 9.3%

By Saskia Scholtes in New York

Published: April 15 2009 19:14 | Last updated: April 15 2009 19:14

Concerns over the leading US credit card companies grew on Wednesday as Capital One Financial, a leading issuer, reported that its credit card loss rates were exceeding the unemployment rate.

Credit card writedowns have topped the jobless rate on a handful of occasions in the past, and only once by any significant margin. That was in 2005 as a flood of borrowers entered bankruptcy and wrote off their credit card debt before the passage of a law that made it harder to file for bankruptcy.

However, as the current recession has deepened, bankruptcy filings are once more approaching pre-2005 levels, contributing to the rate of credit card losses.

Credit card loss rates have in the past closely tracked the rate of unemployment. But in this recession that relationship is breaking down. Economists say this is because job losses, which pushed unemployment rates to 8.5 per cent in March, have compounded other sources of financial distress such as the housing slump, stock market volatility, and the collapse of consumer confidence.

Capital One said its net charge-off rate for US cardholders – debts it believes it will never collect – rose to 9.33 per cent in March, up 1.27 percentage points in one month.

The group’s shares fell 6.9 per cent in morning trade while, of the other large issuers, Bank of America declined 5.45 per cent, Citigroup was down 6.53 per cent and American Express was 2.29 per cent lower.

Brian Shniderman, head of the US credit card practice at Deloitte, said job losses had a “ripple effect” on the credit card business, as even consumers who still had jobs adjusted how often and how much they spent.

“You can estimate that for every person directly facing unemployment, at least five other people will be impacted secondarily, and change their payments-related behaviours,” said Mr Shniderman.

“So while there has clearly been a direct correlation between unemployment and defaults, as unemployment increases beyond a certain threshold, its impact actually increases due to the increasing role of the secondary ripple effect.”

US credit card charge-offs soared in February to 8.82 per cent, a record in the 20-year history of Moody’s credit card index. Moody’s predicts the charge-off rate will peak at about 10.5 per cent in the first half of 2010, assuming a peak in the unemployment rate of 10 per cent."