Plastic: Are Banks Over Their Limit?

Credit-card holders have been on a buying binge that could lead to a big bust. Balances outstanding on Visa and MasterCard credit cards at the end of 1994 were a record $256 billion, up 24% from 1993's $206 billion. That growth far exceeds the 5.8% growth in consumer spending. Eager to grab market share in a lucrative, seemingly low-risk business, bankers and issuers of such less widely held cards as Discover and Optima have been cranking out alluring credit-card offers of low interest rates, no fees, and freebies such as frequent-flier miles.

Unfortunately for card issuers, though, the party could soon come to an end. Interest charges on many cards are rising with each rate hike by the Federal Reserve, making it harder for consumers to stay current. Rising rates also tilt the scales toward a recession, which has always meant more payment delays. Couple that with the huge balances and you have the makings of a pronounced increase in credit-card delinquencies. "We have no doubt that delinquencies and losses will rise from these levels," says Moshe A. Orenbuch, an analyst at Sanford C. Bernstein & Co. "The only question is the speed." Orenbuch and other experts think delinquency rates could peak at higher levels than in the 1990-91 recession, which led to $8 billion in card charge-offs in one year.

The recent blizzard of card offerings masks the looming problem. The number of U.S. cards has soared: Visa and MasterCards increased from 208.3 million in 1990 to 266.5 million at the end of 1993. The delinquency rate on those cards in early February was near a record low at 3.89% of receivables, according to RAM Research & Publishing Co.'s Bankcard Barometer newsletter. One reason is that new card accounts simply haven't had time to go bad.

That's likely to change. The February rate was slightly higher than early January's 3.85%. And, says Edward O. Bankole, a senior analyst at Moody's Investors Service, "as 1994 accounts start to age, we'll see delinquencies and losses start to trend up." That will continue as card accounts reach the peak delinquency age of 1.5 to 2.5 years.

Meanwhile, the sheer volume of new accounts will exacerbate the pain of card issuers. Some customers may even be stockpiling no-fee cards to tide them over during tough times, such as when they're out of a job or maxed out on other cards. That's just the time issuers don't want the cards used.

Consumers, further, are increasingly using credit cards for things they used to buy with cash or checks. From supermarkets to dentists, almost every type of merchant now accepts credit cards. But if consumers routinely use cards for necessities, they may have trouble cutting back on charges even if they lose their jobs in a recession.

TEASERS. Rising rates on cards could be another problem for issuers. Scott P. Marks Jr., executive vice-president of First Chicago Corp. and head of its bank-card group, thinks banks are targeting better customers, but "everyone in the industry expects upward pressure on credit losses as interest rates ratchet up." Today, 72% of all standard cards have variable rates vs. 33% three years ago, according to Bankcard Barometer. And many of those cards were issued at initial "teaser" rates below 9% that rise after a set period. One example: Citibank offers an 8.9% initial rate for customers who transfer balances to a Citibank card, but after a year the rate changes to prime plus 9.4%--or 18.4% at today's rates.

Many bankers insist there's little cause for alarm. Rates are not that big an issue, they say, and delinquencies are currently at such low levels that an increase would be easily manageable. Aviad Broshi, senior vice-president and credit executive for Chase Manhattan Corp.'s credit-card business, says consumers are making monthly payments in excess of what's required, which suggests that they can handle higher interest costs. Similarly, Bruce L. Hammonds, senior vice-chairman and chief operating officer of MBNA Corp., says that while he expects delinquencies to rise, "1994 was possibly our best year ever, and now we're getting back to normal."

Hammonds had better be right. With all the cards and all the debt out there, the cost of being over-optimistic would be heavy indeed.

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