05 January 2009

Economic Indicator: the Mailbox

I was certain that I received less mail in the months of November and December. Short of counting pieces, which would be counterproductive to the enjoyment of spending less time sorting mail, I just made a mental note to check it out after the holidays.

I was right. Mail was down. Fewer catalogs—that was the first observation. And fewer credit card offers—it took a while to realize that one.

Year-end news reports made clear that credit card companies were changing their practices. Some people saw their credit limits lowered. Some saw their rates go up. And a smaller number of consumers saw the next painful result: lowered credit scores.

If you aren't carrying a balance, you just take in those news stories. Hmmm. Yep. Tough times ahead for anyone living on their credit cards. Likely to get worse as more people face layoffs. Hmmm. Yep.

So, the direct impact doesn't reach you until you notice you're receiving fewer credit card offers in your mailbox. What's wrong with that impact? That should be good news, right?

No. There is no good news in the current economic downturn. A decrease in junk mail, unfortunately, is bad news.

Credit card companies (including the ones turning into bank-holding companies in order to apply for federal bail-outs) are expecting increased charge-offs in 2009. That's not a word we're accustomed to hearing because a charge-off is an expected part of the credit card business. It's the amont of bad debt that a company writes off every year. If you were a credit card company (or any business relying on humans making monetary payments) you would expect to see several percentage points a year labeled as charge-off, loss, etc.

But you probably wouldn't be prepared for a double-digit percentage. And that's a possibility in the near future. Current charge-offs are around 5.5%, which sounds OK compared to the 7.9% level in 2001. The problem is that the average for the past 10 years was 5%, so high charge-offs in 2001 were countered by much lower charge-offs in other years. And other economic indicators (layoffs, foreclosures) are much more dramatic now than in 2001.

We can hope that the dire predictions for 10% charge-offs are wrong. Not so much because we care for the credit card companies' profits as because we know what that double-digit percentage would represent in terms of consumers' need to use their cards for staples, not luxuries.

From the movies: If you are old enough to remember Kramer vs Kramer (1979), you can correct me if I have mis-remembered the protagonist's use of a department store credit card to buy food for supper. I'm thinking of Dustin Hoffman's character. The cocktail-party-style foodstuffs provided sustenance for the man and his son when cash was short. (If you remember all this, you are also old enough to remember the first time your local grocery store accepted credit cards. And then your movie theatre. And then your fast-food drive-through.)

© 2008 Mary Bold, PhD, CFLE. The content of this blog or related web sites created by Mary Bold (www.marybold.com, www.boldproductions.com, College Intern Blog) is not under any circumstances to be regarded as professional, legal, financial, or medical advice. Or education advice. Or marital advice. Or even a tip.

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