Good Money Management Hurting Credit Card Issuers
That increase in consumer credit reported by the Federal Reserve earlier this month isn't reflected in the returns of major credit card issuing banks. Several major banks reported first quarter earnings this week,and some of the largest credit card issuers reported surprising downturns.
Many issuers of consumer credit reported losses during the last quarter of 2005, but expected profits to rebound after losses associated with the October rush of bankruptcy filings were absorbed.
Now, creditors who pushed hard to make consumers "more responsible" about credit card debt have received an ugly shock: it worked. It's unclear whether or not the recent bankruptcy reform impacted the trend, but consumers are doing more than keeping their minimum payments up to date. Instead, many are paying their accounts in full.
During the first quarter of 2006, J.P. Morgan reports a decline of $8 billion in outstanding credit card debt. Citigroup reports a decline of $5.7 billion.
The credit industry might have wanted to ensure that credit accounts were paid, but it certainly didn't intend that they be paid off--or even necessarily on time. The industry's profit depends on interest charges and fees associated with late payments and charges beyond established credit limits.
According to Dow Jones's MarketWatch, officials at both banks admit that these timely payments of outstanding balances present problems for the banks.
Not surprisingly, the column also reports that some issuers are already increasing other fees to compensate.
