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Hike in card payments could hurt lenders

Making the minimum payment on your credit card bill might not be as easy as it used to be — and two of the nation’s largest banks say their own finances might suffer as a result.
/ Source: The Associated Press

Making the minimum payment on your credit card bill might not be as easy as it used to be — and two of the nation’s largest banks say their own finances might suffer as a result.

Both Citigroup Inc. and JPMorgan Chase & Co. said in recent filings with the Securities and Exchange Commission that delinquencies and charge-offs might spike in the second half of the year. That’s when the banks believe new federal guidelines that require significantly increased monthly minimum payments will begin to hurt customers already struggling to pay bills.

The new requirements imposed by the Office of the Comptroller of the Currency — which regulates banks and some credit card companies — are designed to help customers avoid getting deeper into debt. However, a new spate of defaults as customers adjust to the new minimums could hurt profit at the nation’s card issuers — especially those that cater to borrowers with weaker credit.

“Banks will not only have increased losses, but reduced revenue as well,” said Lehman Brothers analyst Jason Goldberg. “For some customers, the banks will have to reduce interest payments in order to keep them from defaulting. There’s a bit of uncertainty because it’s hard to predict human behavior.”

Banks have instituted the new minimum balances at a time when American families continue to reel from credit card debt. The Federal Reserve said last month in its survey of consumer finances that 46.2 percent of all families now carry a credit card balance — up from 44.4 percent in 2001.

Meanwhile, consumers are also carrying higher balances — with the mean balance growing to $5,100 from $4,400 in 2001, according to the report. The median income is currently $43,200 and the typical family’s credit card balance is now almost 5 percent of their annual income, according the Fed said.

The new guidelines require credit card issuers to charge an amount that includes not just the outstanding fees and finance charges, but at least 1 percent of the principal owed. This could cost JPMorgan and Citigroup each about $500 million of losses and lost revenue this year, Goldberg said.

Citigroup, the nation’s largest financial institution with about $120.32 billion in revenue last year, has more than 130 million credit card accounts. The majority of its card holders pay more than the minimum due, but the bank didn’t have a specific breakdown available, according to Citigroup spokesman Samuel Wang.

At JPMorgan, which has more than 110 million credit card accounts and posted about $80 billion of revenue last year, customers were required to make the new minimum requirements at the end of 2005. Prior to the change, about 10 percent of its overall customers were making only the minimum payment, said JPMorgan spokesman Paul Hartwick.

Bill Hardekopf, chief executive of credit card Web site, said many of the credit card companies will be affected as consumers move to consolidate their cards.
He believes most consumers will get over the “sticker shock” of being forced to make higher payments, and the amount of defaults will lessen as months go by.

“The new minimums could be very beneficial to credit card companies because they’ll get their money quicker, but it could become very expensive if it has the effect of driving more consumers into bankruptcy,” he said. “It’s too early to tell, but this won’t hurt the big boys as much as it will hurt the subprime lenders.”

Subprime lenders have a higher incidence of charge-offs and delinquencies, and charge customers higher interest rates because they are deemed less credit worthy. Some of the bigger public companies that have large subprime businesses include issuers such as Capital One Corp. and Providian Financial Corp.

The actual impact of the new minimum payments won’t be known for a few quarters, analysts said. In fact, JPMorgan said in its filing with the SEC that it expects the first six months of the year to see sharply fewer bankruptcies as a result of new laws that went into effect.

Credit card companies were besieged by losses stemming from a surge in consumer bankruptcies in the fourth quarter. Banks reported a sharp increase in loan charge-offs amid a rush of consumer bankruptcy filings prior to the Oct. 17 change in the nation’s bankruptcy law, which made it more difficult for consumers to discharge their debts.