This item made the news today: “Late Payments on Credit Cards Showed Strong Decline in Fourth Quarter 2005.” (Source: American Bankers Association’s Consumer Credit Delinquency Bulletin) In the third quarter of 2005, the number of credit card accounts 30 days or more past due stood at 4.74%, while this figure dropped to 4.27% in the fourth quarter.
So why am I predicting that late payment rates will rise in 2006 when Q4 of 2005 shows a decline? Simple. The results from the end of 2005 include the fact that anybody thinking about bankruptcy had already filed before the new rules went into effect on October 17, 2005. So the decline is artificial at best, and hardly the good news that was reported today.
As we move through 2006, my prediction is that the late payment ratio will rise again. The main reason is because the banks are in the process of raising required minimum payments under pressure from the Office of the Comptroller of Currency. This is a well-intentioned attempt by the Fed to help consumers out of the “endless-minimum-payment” debt trap, but the real-world result will be higher default rates. I talk to consumers on a daily basis who are already struggling to maintain the bare-bones minimum payment level. Add just an extra $50-$100 to that minimum payment level, and many consumers will simply not be able to keep up. So I think I’m pretty safe in predicting an increase in the default rate.
As actual results come in later this year, I’ll post the figures here on this blog. The previous record was 4.81% for the second quarter of 2005. I predict that we will set a new default record and top 5.0% for the first time in the third quarter of 2006. Stay tuned …
And, if you’re already feeling the pinch of the higher minimum rates, you should consider the debt settlement strategy as a means of dealing with the problem.