Thrifty Loans

There are new fears for debt in the United States, with concern that $415bn of credit card debt there could be sucked into the void created by the credit crunch.

Britain’s biggest bank, HSBC, has warned that it is seeing knock-on effects from US subprime mortgage business onto other consumer loans across the Atlantic. The banks made an extra $700m writedown on car loans and credit card debts in quarter 3.

Traditionally credit card borrowers do pay back what they owe so it has always been regarded as one of the safest and most profitable debts for banks. Any change in that pattern could have a devastating effect on banks, with over half the $920 of US credit card debt having been bundled into chunks much like the sub-prime mortgage debt which has had such a far-reaching effect on world financial markets.

The amount of securitised credit card debt has been rising rapidly. Standard & Poor’s (S&P) figures show that there was $415bn of the debt in the US at 1 September – a rise of almost $40bn on the previous year.

Default rates (“delinquency rates” in the US) have been rising by 4.5%, up on the 3.8% of 2006. The repayment rate is also slightly down. These figures are fuelling fears for worse news to come.

David Wyss, of S&P says that US credit card debt is stable for the moment as delinquencies are actually at long term low levels. They could reach 6% without being a cause for concern. However, he did add that an increase in losses could mean worrying times ahead for the credit card market.

A steep rise in credit card delinquencies would mean a big hit on pension funds and mutual funds, both of which trade in securitised credit card debt.

The amount of subprime credit card debt issued in the US is unknown, so how big the problem is remains hidden.

Douglas Flint, finance director of HSBC, said that what had emerged in the third quarter was that “the housing market deterioration is beginning to have broader impact, both within the market and beginning to extend to other areas”.