Even as many consumers stop paying their debt, cut back on their credit card use and banks suffer losses, it doesn't mean the industry is in anywhere near as severe a crisis as housing, according to industry analysts.
"Ninety percent of people are paying their credit card bills," says Michael Dean, managing director of Fitch Ratings. "Those people are current in their payments. What's going on with credit cards is bad, but it's not like housing. It's not really a major concern."
The Federal Reserve has approved several rule changes to help consumers. The rules will take effect in July of 2010. They will:
- Forbid banks from imposing interest charges using the two cycle billing method
- Stop unexpected interest charges, including rate increases during first year
- Require that consumers have a reasonable time to make payments
- Prohibit use of payment allocation methods that maximize interest charges
- Keeping banks from increasing interest rates on closed accounts
Banks, even as they come under scrutiny By Congress and the Obama White House for their lending practices, won't be hurt all that much by the credit losses, says Sand.
"The debt is mostly concentrated in a few big lenders," Sand says. "These are the big banks, Citi, Bank of America, JP Morgan. The phrase 'too big to fail' applies in this case."
"Even if ten percent of the $955 billion in credit card debt defaults, it's not the same as what happened on the mortgage front," says Bankrate's McBride. "There won't be a big impact on the banks and the economy."
"I don't believe it's a crisis," says Garrett. "The concern is about the economy and the effect down to consumers who have to pay their credit card debt. But it's not a crisis."
But if anyone thinks a trend to cut down on credit card spending is permanent, they would be wrong says Fitch's Michael Dean. "Using credit cards has become a fabric of behavior," Dean says. "After all the economy returns we expect use to be about the same."
And that could be a problem, says Garrett.
"I think our entire economy has taken on too much debt, from consumers to the government," Garrett says. "I'm not being an apologist for easy credit but people spend the money when they probably shouldn't. We've stopped asking the question do I need this. Instead we ask do I want this."