Defaults Responsible for Decrease in Credit Card Debt

Cybersecurity a double-edged sword
By Heide B. Malhotra, Epoch Times
October 8, 2013 Updated: October 7, 2013

An increase in U.S. credit card debt could indicate that consumers are spending more. However, if the increase is minimal, it is not necessarily a good sign. It could mean that consumers are borrowing to pay the bills and not because consumer confidence has improved. 

“However, if wages and employment are improving at this sluggish pace, this might well be an indication that families are borrowing to make ends meet rather than a reflection of a well-founded increase in consumer confidence,” according to statistics on NerdWallet, a consumer information website. 

Consumer confidence fell slightly in September. The Conference Board Consumer Confidence Index fell by 2.1 points during the month. Additionally, the Expectations Index fell by 4.9 points during the same period.

Credit Card Debt by the Numbers

Market researchers learn from indices how consumers view their ability to bring home a decent salary. However, borrowing activities show consumers’ actions in real life.

Borrowing is one way of paying for everyday purchases. Market researchers state that credit card debt is the third largest source of borrowing in the United States, and so this type of borrowing indicates if the consumer has confidence in the economy. 

Credit card debt numbers are reported with less frequency than other kinds of lending activity. The most recent data was reported at the end of July. According to the Federal Reserve (Fed), credit card debt decreased by 2.6 percent in July. 

The Card Hub website doesn’t provide monthly but quarterly numbers. Total credit card debt was $799 billion by the end of the second quarter. The monthly number disclosed by the Fed was somewhat higher at $851.6 billion. 

According to Credit, the difference is that the Fed credit card statistics are slightly lopsided. They don’t include credit card debt of those who don’t have a Social Security number or a credit report.

Writing Off Delinquent Accounts

According to market researchers, a major portion of the decrease in credit card debt is explained by credit card issuers writing off delinquent debt. 

TransUnion doesn’t quite agree and disclosed that delinquencies were slowing down and thus fewer write-offs are done. 

The U.S. credit card delinquency rate was lower at 0.57 percent at the end of the second quarter, according to a TransUnion report. The delinquency rate reports on borrowers who default on their credit card debt for 90 or more days. 

However, investor website ADVFN said that according to Capital One, U.S. credit card delinquencies increased by 0.15 percent in September.

Credit Card Fraud on the Rise Worldwide

Fraud is a problem for credit card users and issuers alike. A recent Nilson Report stated that $11.3 billion was lost worldwide to fraud in 2012, which was 14.6 percent higher than in 2011. 

Issuers worldwide absorbed 63 percent of the losses, and merchants absorbed 37 percent, according to Nilson’s report, published on the Business Wire website. 

U.S. credit card issuers’ portion of the global losses was 47.3 percent. A reason for the difference is that in the United States consumers rarely use credit cards to withdraw cash, and additionally, any cash transfer is protected by a PIN number. 

However, fraud at ATM machines and the use of counterfeit cards are not included in the fraud report. Therefore, U.S. credit card fraud numbers are underreported.

Cyber-Attacks Bring Losses

According to computer security experts, malware attacks are a growing concern to credit card holders, issuers, and merchants alike. Malware programs are custom written and may not trigger warnings from anti-virus systems or software.

“A cyber-attack that hit Harbor Freight Tools and likely exposed card data processed at all 400 of its retail tool stores could rank among one of the biggest retail breaches this year,” said a card issuer in a recent article on the BankInfoSecurity website. 

In June, Raley’s Family of Fine Stores was targeted by a sophisticated cyber-attack. It didn’t report how many cards were compromised; however, in August, it stated that a few of its customers had reported unusual activity to their banks. 

In May, the U.S. prosecutor’s office for Brooklyn, N.Y., said a group of cyberthieves stole $45 million worldwide in a single day by hacking into debit card companies, removing withdrawal limits, and then taking cash from cash machines. 

A similar attack, reported in April, exposed 2.4 million debit and credit cards between Dec. 1, 2012, and March 29 of this year at Schnuck Markets Inc.

Beefing Up Cybersecurity

This year, President Barack Obama signed an executive order that calls for information sharing and the development of standards that protect America’s cybersecurity. However, it is not clear if the sharing is voluntary or mandatory. Furthermore, such a requirement could raise privacy issues with retailers facing a string of lawsuits.

Retailers are concerned about the White House executive order. Although they believe that attacks on electrical grids and pipelines need to be addressed, “merchants are worried about their supply chains becoming snarled in a new level of government bureaucracy,” according to an article on the National Retail Federation’s (NRF) Stores website. 

Furthermore, if the language written by U.S. lawmakers is too open-ended, it could give the Department of Homeland Security too much leeway. 

For example, any store that sells food could face bureaucratic issues if the nation’s food supply is given the critical designation. 

“While hacking incidents against major retailers have drawn headlines, NRF has emphasized that retail data breaches have almost exclusively involved efforts to obtain credit and debit card numbers, not the attempts to attack ‘critical infrastructure,’” according to the NRF article. 

Credit card debt is in the billions, and delinquencies, fraud, and cyber-attacks aren’t going away any time soon. Therefore, card issuers and handlers, such as retail stores, need to address this and consumers must be educated.

Further government involvement is a double-edged sword that could result in a bureaucracy that makes it more difficult to use credit cards, but it could also push credit debt numbers downward.