Credit Cards and Unemployment

The government has offered to infuse indefinite amount of funds to prevent a total collapse of the housing and mortgage market. While this is good on a macro scale very little it being done in other areas of the credit crunch or mortgage meltdown. This article from the Chicago Tribune titled Consumer debt defaults looming large addresses the other areas that are becoming problematic but have been largely ignored.

With more people out of work, that likely means many are having a tougher time paying their bills. If that leads to a surge in defaults on debt assets beyond just mortgages, such as credit cards, auto loans and more, we can forget about the credit crisis being over any time soon.

...
But the bailout can't be viewed as a cure-all for U.S. credit problems. The government is trying to prevent further deterioration in the mortgage market, but it hasn't done much to ease other credit troubles.

...
Americans this year have been increasingly using their credit cards to make purchases. Banks have tightened lending standards on such things has home equity loans, which consumers used heavily in recent years to finance spending. New data from the Federal Reserve show that consumer borrowing on credit cards grew at an annual rate of 4.8 percent in July, up from a growth rate of 3.5 percent in June.

But as credit card use has surged, payments on those cards have fallen, even though $106.7 billion flowed into Americans' wallets in recent months from the U.S. economic stimulus package. Card payment rates fell 6.2 percent on a year-over-year basis in July, the ninth consecutive monthly decline. That's the second-biggest pullback in the records kept by the banking analysts at Oppenheimer & Co., behind March's year-over-year decline of 7.4 percent.

With prices going up and real wages going down people are depending more and more on credit cards. Most people do not make drastic changes the minute they hit the unemployment lines. Those changes come slowly as the difficulty in finding new employment increases. But the real shocker from the article is that people who are unemployed are not paying their bills - event their credit cards. Lets take a look -

Research by Merrill's economics team found that there is a tight historical link between the unemployment rate and consumer credit card delinquencies.

"So even with this dramatic support just unveiled for the mortgage market, we anticipate the next phase of the credit crunch will be in the form of lenders being forced to revise up their consumer-credit loss estimates once they start to more fully take into account a deteriorating employment backdrop," Rosenberg said.

The losses might not begin to intensify until 2009, because there is a lag between when someone is out of work and when loan defaults begin.

Wow a find. Could there be a link between people buying house and cars and the unemployment rate? Unemployment and foreclosure?

And 2009? What else do we expect to see imploding in 2009? Oh yeah the Option ARM implosion will just be beginning. Boy does 2009 look to be a difficult year.