Credit card charge-offs predicted to rise further

05.04.09
By Sarah Beldo

Although there have been some indications that the U.S. economy may be turning around, most financial experts say people should brace for a bit more darkness before the dawn.

The latest predictions from Fitch Ratings fall firmly within that line of thinking. In a report entitled Credit Cards: Asset Quality Review 1Q09, the company says it is very likely that credit card charge-off levels will worsen significantly during the second quarter of the year.

Charge-offs happen when a credit card company decides that credit card debt is uncollectable and writes off the outstanding balance. This typically happens after an account has been delinquent for at least 180 days.

However, just because the lender deems the money uncollectable doesn't mean the borrower is off the hook.

Instead, they are still responsible for paying back the full amount - and the charge-off will stay on their credit report for seven years, significantly impacting their credit score.

Last month, Fitch reported that credit card charge-offs had risen to a high of 8.4 percent during the first quarter of the year - a 47 percent jump on figures from just one year earlier.

Because of this trend - and because unemployment continues to rise - the company forecasts more credit card pain is set to come.

Meanwhile, some consumers seem to be responding to such financial woes by cutting down on their use of credit cards, opting for debit cards instead.

According to the most recent figures from Visa, the total dollar volume of purchases made with a debit card during the fourth quarter of 2008 was higher than that made with credit cards for the first time in the company's history.

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Just because the lender deems the money uncollectable doesn't mean the borrower is off the hook.