Despite the recent news hogging headlines about the sudden unexpected drop in default rates among banks and credit issuers, experts are saying that the trend can soon reverse.
According to analysts, the U.S. saw far fewer defaults in recent months because of the Federal economic stimulus plan and the issuance of tax refunds. Many Americans who are on the verge of being tagged as credit delinquents are using their tax incomes to pay off debts and settle loans.
The nation's largest banks and credit card companies are expecting to see more cardholders fall back on their regular payments as the nation's unemployment rate continues to rise. The Bank of America, JP Morgan & Chase, and American Express can expect more credit card defaults in the coming months as Americans run out of money from their tax refunds to pay off their mounting debts.
Many economists and industry experts are growing increasingly concerned over the increasing number of consumers failing to settle their loans within 30 to 59 days. Card issuers and financial institutions often consider delinquencies as precursors to charge-offs.
To date, the credit card industry has suffered $82.4 billion in losses due to charge-offs or the amount of money that banks do not expect to be repaid by consumers. This figure is expected to rise if the charge-off rate reaches 18 to 20 percent, the Federal Reserve said in a statement.
More consumers are also going through shifts in spending behaviors, experts noted. Americans are allotting more of their income to their savings rather than purchase products and services.
The increasing default and charge-off rates are also forcing many financial institutions to radically change their policies on issuing credits. Most banks and creditors are becoming stingy on issuing new credit cards to consumers because of the current economic situation.
American mailboxes also received considerably less mail solicitations from credit card companies - a sign, experts say, that issuers are keen on recovering losses rather than giving out credit. In 2005, banks sent close to 6 billion solicitations to consumers through the mail. Last year, however, only an estimated 2 billion were mailed.
Analysts also say that charge-offs and unemployment rates are closely connected and many banks are monitoring the number of unemployed Americans to come up with new policies. At present, the unemployment rate has risen to 9.5 percent and is expected to reach the 10-percent mark by the end of the present year or early next year. The number of jobless Americans this year is the highest in almost 26 years.