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Credit Card Companies Face a Grim Future


When consumers don't spend, plastic loses out.

The past quarter century was a fun one for the American consumer. But after all that borrowing and spending, consumers have re-discovered the benefits of thrift and prudence. This is good news for personal balance sheets, but bad news for credit card companies.

In a recent report, Fitch Ratings forecast that US credit card issuers will continue suffering with respect to their earnings over the near term as a result of the lousy labor market, bankruptcies, and losses.

The report, as summarized here for us by the gang at Zacks Equity Research, notes that major credit card issuers are still dealing with tough losses as the US unemployment rate hurdled over 10%.

"Also, as it is expected that the rate will remain above 10% through 2010, consumers will increasingly fall behind on payments," write the crew at Zacks. "As a result, the losses of the credit card issuers could worsen further."

Fitch's rating outlooks are negative on the less diversified credit card companies, which are at risk of a downgrade. That hit list includes: Capital One Financial Corporation (COF), American Express Company (AXP), and Discover Financial Services (DFS).

According to Fitch, prime credit card delinquencies of 60 days or more climbed 16 basis points to 4.22% in October. The rating agency forecasts higher loss rates in 2010.

Additionally, more trouble for these companies is coming in the form of the Credit Card Accountability, Responsibility, and Disclosure law signed by President Barack Obama in May 2009.

Key components of the act include an inability to raise rates on existing card balances, a requirement to maintain promotional rates for at least six months, and a restriction on fees for subprime, low limit cards. See also The Gall in Your Credit Card's Fine Print.

Most of the new requirements will take effect in February 2010.

At the same time, write the analysts at Zack's, consumers have been transitioning from credit cards to debit cards (See Seven Ways to Avoid the Debit Card Blues). So the credit card companies don't have much room for improvement until the economy starts to enjoy a sustainable recovery.
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