THE BLOG

Pondering Moving Credit Card Debt

03/31/2010 05:12 am ET | Updated May 25, 2011
  • Dennis Santiago Systemic Risk and Global Stability Observer; Architect of Risk Measurement Systems

For most consumers the closest one ever gets to the world of finance will involve two things. The mortgage and one's credit card(s). This story is about the credit card.

I'm told that one of the fairly common questions arriving in the Move Your Money inbox asks about whether it's also a good idea to move one's credit card account. Credit cards, or more precisely revolving unsecured debt, is a form of lending where a bank takes the extraordinary chance of extending you credit based on the statistical probability that you can and will pay your debts. If you carry a balance on your credit card, the bank earns interest from it's unsecured loan to you. These rates can vary from favorably low to strangely high. If you are late on a payment, the credit card issuer furthers earns fees and penalties from you. These are designed to hurt -- some very painfully --- to the point that a rational person will tend to avoid such events to the extent possible.

Those strangely high interest rates are driven by the fact that credit card lending is a business that -- by it's very nature - is beset by risks. There are built-in loses that are part of the business. Fighting fraud costs a lot of technology just in case you've been under a Rip van Winkle blanket and haven't noticed the extent to which the industry now goes to find and eliminate identity theft as quickly as possible. Struggling economies also increase loss rates and what we've been going through in this country does relect in the overall industry numbers.

U.S. Bank Issued Credit Cards

Period# of

Issuers

Unsecured

CRCD Balance

Annualized

Gross Defaults

Loss Given

Default, %

Unused

Commitments

2009091,598$392,973,9951,034.6 bp92.33%$3,284,033,122
2009061,632$398,232,789992.3 bp92.18%$3,394,681,251
2009031,671$403,071,544893.7 bp91.64%$3,536,204,333
2008121,705$444,636,764567.6 bp87.47%$3,932,540,761
2008091,739$411,627,114583.4 bp86.47%$4,387,088,355
2008061,775$396,047,252604.2 bp85.74%$4,505,530,798
2008031,811$386,853,839593.3 bp84.68%$4,498,291,240
2007121,829$422,481,246444.2 bp83.04%$4,468,170,745
2007091,863$384,539,907475.5 bp83.62%$4,335,767,215
2007061,890$372,853,337481.6 bp82.52%$4,206,027,192
2007031,909$354,169,276515.4 bp82.55%$4,082,267,768
2006121,942$384,979,758414.6 bp81.61%$3,930,025,290
Source: IRA Bank Monitor. Amounts in $1000's unless specified.

Things are not too good in credit card land these days. Default rates have risen considerably in the last few years. Today's math lesson is that a basis point is 1/100th of a percent. By September of 2009 the default rate on credit cards was above 1,000 basis points. That's over 10 percent of these credit card loans faltering. Doubling the loss rate on your business is enough to make anyone unhappy and there's no lack of sharing the misery when it comes to credit cards. Most notable is the fact that unused commitments, basically the amount of credit limit extended to consumers by the industry is shrinking. From a peak of $4.5 trillion in June 2008, it's come down a dramatic 27 percent to around $3.3 trillion as of last September. That's a real hit measuring how much the convenience of swipe to pay has been hurt in this country. That my friends is what the academic concept of a "credit crunch" means to ordinary folk.

But within all this noise is something to notice. The amount of unsecured credit balance outstanding really doesn't change that much over time. It's around $400 billion, roughly 1/2 the amount of checking account deposits in the banking system as a whole. Listen carefully because all those commercials enticing you move your balances from one card issuer to another are about to make total sense to you. It's a zero sum game! The business interest of the credit card issuer is very much to get as much of credit card balance holding customers in-house as possible. Maximizing assets under management means more interest earnings per operating period.

Favorable introductory rates and good payer rates are the "toasters" of the credit card world. They're meant to capture and retain valuable "interest on outstanding balance" paying customers. This means if you have one of these credit card accounts and diligently pay the minimums on time every month -- yup, yup -- you are valuable to that bank. Perk up! You are valuable whether you have a checking account there or not. What you also need to realize is that every other credit card issuers out there also covets you. That's why those things keep clogging the mail box and wink at you from the computer screen every time you log on or off your online banking. Just make sure to keep paying that minimum and your account will keep getting the favorable treatment.

You can use modern technology to do this for you automatically. What I do is tell my online bill payment to make a recurring standard minimum payment to each credit card account scheduled to always hit two days before the due date for that card every month. I do this even for gasoline cards, basically the ones that are likely to be used during the month. Then I'm not under pressure to watch the timing of payments like a hawk. Do make sure it's two days lead time so you'll never get caught where one bank sends the electronic funds transfer (EFT) message to the other bank after the receiving bank has already started it's daily processing run. And remember, you can make that payment from any online banking system, even the one from that local community bank where some or all of your other money lives next.

One more thing on this. Credit cards accounts are usually assigned to a separate service division and at the largest banks often a different dedicated credit card bank unit of a larger bank holding company. Want an easy way to find out? Call the customer service service number for your checking account and ask whoever answers to change or check on something related to your credit card. If they tell you they need to transfer you it means their computers aren't connected. That's why you have to give the next operator all your id info all over again. They aren't trying to annoy you. They're just hiding that fact that you really are being transferred to another company. The same thing often happens when you ask to check on your mortgage by the way. They'll transfer you to the servicer for that loan.

The bottom line is that your credit card need not be an impediment to moving your money if you want to. Lot's of people have checking, savings, loan and credit card accounts spread over several banking institutions. Rest assured that the finance system has been dealing with "mixed marriage" banking patterns for years. If you've been monogamous, your foray into the world of asset mobility vis-a-vis banking is new only to you.

What about moving where one's credit card outstanding balance is located?

Well let's look at the market split between big and little banks.

Credit Cards in Larger Banks Over $65 Billion Assets

Period# of

Issuers

Unsecured

CRCD Balance

Annualized

Gross Defaults

Loss Given

Default, %

Unused

Commitments

20090920$268,088,9961,070.4 bp93.19%$2,094,538,588
20090617$269,898,1201,005.4 bp93.04%$2,166,232,535
20090320$271,633,757897.5 bp92.65%$2,248,489,873
20081221$295,786,978550.3 bp87.51%$2,573,530,573
20080919$281,226,426552.1 bp86.41%$2,848,660,449
20080620$270,393,711582.1 bp85.46%$2,910,749,620
20080318$263,837,123568.2 bp83.98%$2,887,563,170
20071217$285,303,358457.0 bp84.45%$2,839,759,737
20070917$261,475,251490.1 bp84.51%$2,737,686,278
20070615$253,170,089485.8 bp83.75%$2,668,453,751
20070315$239,230,226527.3 bp83.77%$2,633,607,895
20061216$262,438,291437.7 bp83.70%$2,569,052,530
Source: IRA Bank Monitor. Amounts in $1000's unless specified.

versus,

Credit Cards in Smaller Banks Under $65 Billion Assets

Period# of

Issuers

Unsecured

CRCD Balance

Annualized

Gross Defaults

Loss Given

Default, %

Unused

Commitments

2009091,578$124,884,999957.8 bp90.27%$1,189,494,534
2009061,615$128,334,669964.7 bp90.31%$1,228,448,716
2009031,651$131,437,787885.8 bp89.53%$1,287,714,460
2008121,684$148,849,786602.1 bp87.41%$1,359,010,188
2008091,720$130,400,688650.7 bp86.58%$1,538,427,906
2008061,755$125,653,541651.8 bp86.27%$1,594,781,178
2008031,793$123,016,716647.1 bp86.00%$1,610,728,070
2007121,812$137,177,888417.8 bp79.83%$1,628,411,008
2007091,846$123,064,656444.7 bp81.54%$1,598,080,937
2007061,875$119,683,248472.6 bp79.86%$1,537,573,441
2007031,894$114,939,050490.6 bp79.83%$1,448,659,873
2006121,926$122,541,467365.1 bp76.24%$1,360,972,760
Source: IRA Bank Monitor. Amounts in $1000's unless specified.

The question ultimately is whether of not the credit card industry is deployed well. The above means that 2/3rd's of the interest and fees income from the U.S. credit card market goes to roughly twenty banks. Should that infuriate you? On the one hand, those 20 large institutions are also the ones who -- by necessity -- are spending the most on advancing the state of the art of fraud prevention. That's actually a mission critical "privatized" national investment being made right now. On the other hand, the behavior of credit card issuers to those who aren't "perfect payers" is becoming more and more punitive. The fact is that if these issues are not resolved equitably the future of electronic money WILL (not a maybe) be threatened.

So would some good come from redeploying credit card balances to place a larger fraction of it in smaller institutions? My personal worry is that over concentraing the market share among too few innovators might not be enough for such a national interest priority. Spreading the balances would tend to make finding business service quality and fraud management solutions even more urgent to more banks. Necessity still being the true mother of invention, this might accelerate the process as more banks explore alternative technology approaches to securing their credit cards. Ideally, it sparks a new contest for banks to retain credit card customers based on a new generation of more risk managed services solutions. That in turn means the cost of doing business lessens and puts increased competitive pressure on the system to pass those improvements on to consumers in the form of better interest rates and fee structures. I do believe this issue is strategically important enough that there's merit in all of us trying some out of the box approaches to shake things up.