CARD CHARGE-OFFS HIGHEST IN FOUR YEARS; PROPOSED NEW LAW BLAMED

June 18, 2001

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U.S. credit card issuers wrote off bad loans in April at the highest levels in four years in response to a surge in bankruptcy filings and a sagging economy that has squeezed consumers’ pockets, bond rating agency Standard & Poor’s (S&P) said on Wednesday, according to Reuters. S&P’s monthly credit card charge-off index rose 60 basis points to 6.7 percent in April from March’s 6.1 percent, the highest loss rate since February 1997. The April charge-off figure was worse than the 6.2 percent peak reached in June 1992 during the last U.S. recession.

S&P attributed the increase in bankruptcy filings to the pending bankruptcy reform legislation, which will make it more difficult for consumers to wipe out their debt. Experts said many people are rushing to file before anticipated tougher measures can take effect. The number of bankruptcies filed in the first quarter of 2001 showed a significant rise in consumer filings, increasing by 17.5 percent above the same period a year ago.

“It is expected that the spikes in bankruptcy filings will continue to effect losses in May and June,” S&P said. Perhaps surprisingly, the rise in bankruptcy filings resulted in higher write-offs in April for credit card receivables generated by card holders with top credit ratings than those with blemishes in the their credit histories and pay higher interest rates than prime-card holders.

For prime-card loan portfolios tracked by S&P, about 35 percent to 50 percent of charge-offs in April were a result of bankruptcy-related losses, as the rest of the losses was due to writing off accounts that were past 180 days delinquency. For portfolios of subprime card holders, bankruptcy-related losses were lower, representing 20 percent to 30 percent of total losses, S&P said.