The U.S. Credit Card Industry in 2009

While the global economy is still struggling with the consequences of the subprime (and now prime) mortgage crises, experts believe that the crisis will soon extent to the credit card industry.  Unemployment in the U.S. is likely to increase further, and this will cause a jump in defaults on credit card debt. Since the total outstanding credit card debt in the U.S. has reached a level of 1 trillion USD, higher charge-off rates on credit card portfolios could turn out to have devastating effects for U.S. commercial banks.

In our new RGE Monitor paper, we forecast write-downs on U.S. credit card debt receivables in 2009. We create two models which provide estimates for the future real growth rate of revolving consumer debt and the future net recovery charge-off rates, respectively.  Revolving consumer debt is used as an approximation for credit card debt.  The predictions of the write-downs are divided into nine scenarios.  These scenarios are based on variations in the forecasts of the independent variables.  In the worst case scenario the write-downs could be as high as 146 billion USD. In the best case the write-downs will be around 64 billion USD.  We come to the conclusion that write-downs in 2009 are likely to be significantly higher than in 2008 (50 billion USD).  Considering that the total write-downs on credit card receivables have never exceeded 50 billion USD in the past, it is doubtful if the credit card issuers could absorb write-downs of far above 100 billion USD.