By Mark Huffman

October 13, 2008
The government has taken extraordinary steps in the last 30 days to prop up the banking industry, in a desperate attempt to stem the credit crisis. But could there be another credit crisis lurking, not on Wall Street, but on Main Street?

Millions of consumers have run up huge balances on their credit cards, and with unemployment rising and economic assets losing value, some may find it harder and harder to make the minimum payments, much less pay down their balances.

U.S. credit card debt averaged $1,717 per account in the second quarter of 2008, according to TransUnion, one of the three U.S. credit-reporting agencies. That represents an increase of more than eight and a half percent over the previous year.

The Federal Reserve reports Americans have pushed their total credit card balances to an eye-popping $1 trillion.

Among the thousands of complaints receives each year about credit cards are stories of consumers living close to the edge, where an unexpected service charge or late fee puts them even deeper in the hole. Others have found that credit card companies have cut credit limits and raised interest rates in recent weeks.

Karen, of Ontario, California, says the rate on her Advanta business credit card went from 7.99 percent last month to 25.08 percent.

"When I called I was told that they had notified their customers that there would be a rate change and all customers were given the opportunity to opt out but if the opt out was not exercised then it was too late," she told "I asked what criteria was used to determine this rate increase. I was told that the rate increase was a result of a review of my business and personal credit history and that I was now considered a high risk."

As rates go up, so do delinquencies. Nationwide, late credit card payments are up over 14 percent, with Nevada and Florida having the highest delinquency rates. Not surprisingly, both states are among the leaders in home foreclosures as well.

If consumers can't pay their mortgages, chances are they can't pay their credit card bills either.

Consumer credit crisis?

Innovest Strategic Value Advisors worries that banks' actions to clean up their balance sheets will eventually set off a consumer credit crisis.

Laura Nishikawa, an analyst with Innovest, says credit cards are at "the tipping point." She say issuers have been helping to drive up charge-off rates by taking steps like freezing balance transfers, reducing lines, and limiting access to other types of consumer credit, like home equity lines.

These typical risk management tactics are having an "unintended consequence," Nishikawa said.

"When they reduce credit availability, consumers won't have the ability to roll their debt over, and the issuers will essentially force customers into default," she said.

The Innovest report examines Bank of America, American Express, Discover, Citi, Capital One and JP Morgan Chase. The report benchmarks each bank by its product exposure to high risk consumers, identifies winning and losing strategies, and evaluates balance sheet and earnings sensitivity to credit card performance.

Innovest, which was early with its call on sub-prime mortgages, has determined that what Wall Street and the Federal government are diagnosing as a mortgage problem is, in fact, a symptom of a deeper crisis of deteriorated consumer financial health.

For nearly a decade Americans have been taking on more debt than they could afford.

And in perhaps a warning of things to come, Bank of America reported last week that its otherwise rosy third quarter earnings picture had one notable blemish a significant increase in delinquent credit card payments.