July Credit Card Collapse Report

In last month's report, we expected to see rising charge-offs on bank's credit card receivables as more of their shrinking portfolios were dodgy. Sure enough, when the big banks reported their default rates last month, the results were impressive.

Bank of America - the USA's largest bank - reported a 12.5% default rate in May, up from 10.47% in April. This is a 19% increase in one month! The default rate is also perilously close to the interest earned on all credit card balances (according to the Federal Reserve at last report, 13.54% on all credit card accounts with balances nationally). Effectively, credit cards have become a money-losing operation for the Bank of America. We expect, over the coming months, that credit card defaults will destroy all the capital which the Bank of America allocated to its credit card operation - and then some. Other credit card lenders are suffering the same fate.

Speaking of the Federal Reserve, their most recent report on consumer credit shows a continuing and, to us, unsurprising decline in revolving loans. The drop in April was revised substantially upwards (as we predicted), now equivalent to a 28% annual rate of decline. The May preliminary data shows a moderating of the decline - which we consider to be highly suspicious. We expect next month's revisions to actually show an acceleration - as default induced charge-offs increase, and paydowns by still-solvent borrowers continue. Stay tuned...