Debt crisis spreads to credit cards

By Jonathan Stempel - Analysis

NEW YORK (Reuters) - Even as Washington Mutual Inc (WM.N: Quote, Profile, Research, Stock Buzz) lost billions of dollars from risky mortgages, the largest U.S. savings and loan could rely on its credit card business to turn a profit. No longer.

The thrift's $175 million second-quarter loss from its card unit stemmed from higher delinquencies and an inability to sell some card debt to investors because of illiquid markets. It was Washington Mutual's first card loss since it entered the business in 2005 when it bought Providian Financial Corp.

Washington Mutual is not alone. American Express Co (AXP.N: Quote, Profile, Research, Stock Buzz), Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz), Capital One Financial Corp (COF.N: Quote, Profile, Research, Stock Buzz), Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) face pressure as falling home prices, $4-a-gallon gas and rising food costs leave more cardholders struggling to pay their bills and force even wealthy customers to spend less.

"It is a bleak picture out there," said Curtis Arnold, founder of CardRatings.com in Little Rock, Arkansas. "Consumers are definitely feeling the pinch and delinquency rates are ticking up. I think the worst is still ahead of us."

U.S. consumer credit outstanding totaled $2.57 trillion at the end of May -- roughly $8,400 per person -- and up 68 percent from the start of the decade, Federal Reserve data show.

CUTTING BACK

For much of the decade, lenders raised card limits rapidly as consumers tapped into equity in their appreciating homes to borrow and moved toward plastic and away from cash and checks as a means of payment.

But many consumers became overextended and further burdened as many card rates soared well above 20 percent and as charges such as $39 late payment fees and 3 percent fees on foreign currency transactions became the norm.