What’s going on vis-a-vis the Visa

ned_flandersTo many, the nation’s credit card debt seems a perfect symbol of America’s bubble economy.  Business Week even speculated this past fall that credit cards might follow housing as the next meltdown in our financial system. It seems logical enough:  just as securitized subprime mortgages wreaked financial havoc, revolving credit-card loans are almost inherently subprime, as credit cards are easy to get, charge high interest rates, and have much higher default rates than regular bank loans.  And a good deal of credit-card debt has also been securitized into collateralized debt obligations and other such lipstick-on-a-pig formulations.  Some of them may still even carry bogus AAA ratings.

Business Week‘s article has a graphic that indicates that the amount of bad credit card debt that banks had to charge off was steady at about 25% from 2001 to 2007 and then shot up in 2008, to an estimated 40%, and is projected to go to 90% in 2009.  A Jan. 1 article from Reuters echoes the gloomy assessment, saying that U.S. credit card companies are anticipating possibly their worst year ever.

By the most recent measure, for Nov. 2008, total revolving credit-card debt in the U.S. was just under $1 trillion — granted, less than 10% of total mortgage debt and about 7% of GDP — but, like gas prices, credit-card bills are among the most visible reminders of one’s personal finances.  And according to the Federal Reserve, nearly half of consumers have some credit-card debt, which averages $2,200.   (Those numbers are from at least a year ago; very likely they’ve since gone up.)

My hunch is that in tough times, an unpaid credit-card balance weighs on a person a lot more heavily, even if that person is still gainfully employed.  So credit-card debt could be a major inhibitor of consumer spending, and yet another rock in the ongoing economic landslide.

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