[quote=Raybyrnes]I don’t think so. Credit cards are one of the few financial industries that price to risk. If you have bad credit they charge you 25% interest not 7. I think they are going to take a hit but not to the extreme that you are talking about. [/quote]
You got that right. A typical credit card company – like MBNA, for example – charges an average rate of about 18% on its cards (including the low-rate teaser cards with the higher rate non-teaser cards). In a typical cycle they charge off about 5%, operating costs are about 3% of balances and funding around 4%. So, you get to a pre-tax profit of 6%. Lever that up 5x and you get a pre-tax ROE of 30%, or about 20% after tax. Not bad.
Now ratchet up charge-offs to a previously unheard-of 11% (it could happen, but it’s unlikely – I think right now we’re at 7.5%-ish) and the card company’s still breaking even. Even higher charge-offs and the company’s losing money but not enough to put it under. My point is that the card companies are going to suffer – a lot – but unless we have The Great Depression II, they won’t go BK. There’s an awful lot of cushion in the margin.
