Losses on US credit cards hit a record 10.44 per cent in June, squeezing profit margins for credit card securitisations to a 10-year low, according to Fitch Ratings.
Profits from off-balance sheet vehicles backed by credit loans in June fell below the 5 per cent threshold for the first time since November 1998, said Fitch.
Rising losses on credit cards have in recent months pushed big US banks to come to the rescue of the off-balance sheet vehicles they use to transform hundreds of billions of dollars of consumer loans into securities sold to investors.
Banks have also raised interest rates on credit cards in a bid to counter rising borrower defaults, late payments and boost profitability, underscoring how the deteriorating health of the US consumer is opening new fronts in the financial crisis.
On Tuesday JPMorgan Chase said that, from August, some of its customers would see their minimum required payments rise from 2 per cent to 5 per cent of their unpaid monthly balances.
Most credit card loans are placed into pools â?? structured as trusts â?? that are used to back bonds sold to investors. The banks retain a small interest and manage the trust.
As credit card loans held in trusts are paid off, the money is used to fund new lending, while interest and other charges are used to compensate bondholders and cover any losses. Any remaining funds are profits and are paid to the issuing bank.
Mounting credit card losses are depleting those funds, however, prompting banks to support the securitisation trusts.
Citigroup, Bank of America, JPMorgan Chase and credit card lender American Express have all provided support for their credit card securities in recent months.
