MAY 2004

Credit Card Losses and Personal Bankruptcies

The Federal Deposit Insurance Corporation provided the chart below showing credit card loss rates in relation to the annual number of bankruptcy filings from 1984 through 2003. The chart clearly reveals the close association of credit-card charge-offs and bankruptcy filings. Credit card losses and bankruptcy fillings are driven by a common cause: the general fluctuations in the economy and flawed decisions made by consumers and credit-card lenders. We have something of a "chicken or the egg" problem. Did consumers mishandle their credit cards or did card issuers err in extending credit? (Probably both) Finally, what do we make of the fact that, since 1996, personal bankruptcy filings have out-paced the rise in credit-card charge-offs?

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