Card Debt

Will increasing card debt affect providers?

The recent credit worries have been caused by companies lending money to people on the assumption that the debts would be repaid, then discovering later that the chances of those repayments being made were a lot less likely than originally expected. So will the same fate befall the credit card companies who thrive on lending money to people who don't repay their debts immediately?

If the sub-prime credit situation has caused losses due to borrowers not repaying their loans when expected, then you would expect people who borrow on credit cards to be equally likely to default on repayments. Even though that may be true, the likelihood that this will bring about similar huge losses in the credit card industry is much less.

That's because credit card companies have sophisticated systems that track the behaviour of their customers in very fine detail, almost to the extent that can accurately predict what they will be spending, what they will be repaying and whether they are likely to build up further debts. Of course they make their money when customers have an outstanding debt, by charging interest on that debt. They only lose out when the credit advanced and the interest charges are not repaid.

In the early days of credit cards, interest rates were kept low by law and people were not encouraged to spend by giving them high credit limits, but that's not the situation today. Ever larger credit limits and ever easier ways of spending on cards has brought about a buy now, pay later culture, where hardly anyone saves up for a purchase now. That's not a problem for people who can regularly pay off their full balance, they just use credit cards as a convenience, but for those who can't resist the temptation to spend beyond their means, the real cost comes home to roost in interest charges. With higher mortgage and other household costs upon us, more and more people may fall into this interest-paying category, increasing card debt and making even more money for the card providers, even if the number of defaulters goes up slightly.