'Marketplace' Report: Credit Card Debt

ALEX CHADWICK, host:

From NPR News, it's DAY TO DAY.

If you are putting those last few gifts today on your credit card, bear this in mind. A new study shows an increase in consumers paying their credit card bills late, or not at all.

MARKETPLACE's Steve Tripoli is here to spread the holiday cheer.

Steve, we've heard enough this year about a home-lending debt crisis - now, it's credit cards?

STEVE TRIPOLI: It is indeed, Alex. And you won't be surprised to learn that the two are related. Why are more people falling behind in their credit cards? Well, Dennis Moroney with TowerGroup - that's a research shop owned by Mastercard - links it directly to the home lending crisis.

Mr. DENNIS MORONEY (Senior Research Analyst, TowerGroup): Consumers have lost the flexibility of being able to finance their debt through home equity lines of credit and are now moving those balances over the credit card. And those typically have a higher minimum payment amount, and consequently, people (unintelligible) running into a credit squeeze and running up delinquencies.

CHADWICK: You know, that doesn't sound like much of a solution for consumers.

TRIPOLI: Because it isn't Alex. You know, people don't often think of it this way, but most credit-card debt is subprime debt and that it carries subprime interest rates. You know, credit cards are routinely double the rate on their rates of even subprime mortgages. So obviously, this isn't much of a solution if you're pinched already , but people are doing it because their other sources of credit are evaporating and they're running out of places to turn.

CHADWICK: What's the real measure of the problem, Steve? How big is it?

TRIPOLI: Well, the Associated Press just finished an analysis of 325 million individual credit accounts and that's about half of the nation's total. And both delinquencies and defaults are surging by a double-digit raise over last year. And most every analyst alive thinks it's going to get worse yet in 2008. And that is just loads of pain, and that's in millions of households.

CHADWICK: So is this really a concern for the wider economy? Is just one of these signs that the economists are looking at for next year?

TRIPOLI: Well, you know, most fundamentally, it says that since lots of customers have to rein in, that ripples into our consumer-driven economy so it increases the risk of recession. However - and I hate to go all Grinch on you today, Alex - that's not necessarily where it ends.

Here is why: A lot of credit-card debt is securitized; it's packaged as securities that are sold to investors just like subprime mortgages were. So delinquencies devalue those securities, which could hurt the banks and the investors, like pension funds and indirectly, people like you and me. So that could make its impact on all of us worse, at least, temporarily.

CHADWICK: This really is the Grinchiest view, all right? I mean, this is like, the worst?

TRIPOLI: Well, worst but not far-fetched, though. Well, it's head for the holiday on a cheerier note. At least right now, these securities appear to be better understood and better backed than subprime mortgage securities. And credit-card lending has been tremendously profitable so that could cushion the blow. And card issuers have one other weapon. They went before Congress this month to defend their ability to unilaterally raise credit card interest rates. Now, doing that could soften the blow from all these. But it also means your rate could go up even if you are not personally behind on your debt. So of consumers don't like that deal, maybe they ought to start rethinking their relationship with that plastic in their wallets.

CHADWICK: Steve Tripoli, thank you so much, and merry Christmas.

Steve is with public radio's daily business show, MARKETPLACE, produced by American Public Media. Transcript provided by NPR, Copyright National Public Radio.