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The Next Big Financial Crisis Upon Us

Written By Brian Hicks

Posted June 29, 2009

U.S. consumers are knee-deep in nearly $1 trillion in outstanding credit card debt… and it’ll be the next major crisis to rip through the economy.

Revolving credit is about $1 trillion, up close to 60% since 2000. The charge-off rate – which measures card loans the banks don’t expect to be repaid – hit 10.62% in May from April’s 9.97%, according to Moody’s. 10%!!!

And some expect that rate to surpass 12%, as Americans battle job losses, home losses, 401K lost value, and heavy debt load.

Yep, it’s bad. And bank charge-offs could near $100 billion… this year alone, cutting into loan-loss reserves, and sending the financial community into a whirlpool of hardship. And it’d leave little room for losses on housing and commercial loans.

Check this out. If unemployment rates hit 10%, defaults could explode. At American Express and Capital One, for example, about 20% of the credit card balances are expected “to go bad this year and next.”

As for Bank of America, Citigroup, and JP Morgan Chase, we’re talking about 23%.

And the last thing the financial sector needs to feel is further squeeze, as Americans have accumulated some $970 billion in revolving consumer debt since the end of September 2008, up 3.4% from the close of 2007.

Sure, the credit card industry is typically resilient during our economic slowdowns, thanks to pricing flexibility. And the traditional thinking is that as the economy sours and consumers become late on payments, credit companies can boost earnings through late fees and higher interest rates. But that’s no longer the case.

The jig is up.

Defaults are growing. Charge-offs have been pushed well beyond expectations. And losses are far out-pacing what companies were hoping to account for with extra card fees and higher interest rates.

And as a consumer-driven economy that has trouble saving money, coupled with no available credit, the economy can do nothing but collapse.