More consumers fall behind on paying credit cards

Credit card delinquencies are hitting record highs as more borrowers fall behind on bills amid rising unemployment and falling home values.

The amount of credit card debt delinquent at least 60 days reached 3.75% in December, the latest month available, surpassing the previous high of 3.73% set in February 1998, according to Fitch Ratings, which rates corporate debt. Late payments on credit cards, a precursor to charge-offs, rose during most of 2008 before sharply accelerating in the fourth quarter.

In December, credit card charge-offs — when banks write off the debt — rose to 7.5%, the highest level since 2005, when thousands of consumers rushed to file for bankruptcy and erase their card debt before a new law made it harder to do.

Fitch expects charge-offs to approach 9% in the second half of 2009.

"Consumers are under a lot of stress from the overall economic situation," says Michael Dean, a Fitch managing director.

It's not surprising for consumers to struggle to pay bills during economic downturns. But the record delinquency level "is a reflection of the severity" of the latest credit crunch, says Mark Lauritano, an executive managing director at IHS Global Insight, a financial services research firm.

"In previous recessions, consumers were still able to obtain some credit," he notes.

During the housing boom, consumers could tap home equity to pay off debt. But this funding source dried up for many borrowers as home prices plunged and lenders pulled back on loans.

Some experts also blame consumers' inability to pay their credit card bills partly on banks getting more aggressive with fees and penalty interest rates in recent months.

"If you start raising fees and rates, you will get an increase in delinquencies," says Christopher Brendler, managing director at Stifel Nicolaus, an equity research firm. Yet, "from the credit card perspective, it makes sense. (Issuers) need to protect their profitability as best they can."

Because most borrowers will be able to manage the higher rates and fees — at least at first — those profits will make up for defaults from others, says Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group.

Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, which represents the nation's largest banks, says higher fees can "contribute" but are not the "main cause" behind consumers paying their bills late or not at all.

Banks may be forced to raise credit card rates or fees, he says, "as customers start feeling the effects of the economy, and their risk profile changes."

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