Credit History Doesn’t Tell Entire Story in Bankruptcies
By most lending standards, a 27-year-old mortgage broker earning nearly $100,000 annually who has modest monthly expenses and no blotches on his credit report would be a good credit risk.
And he was, until his company shut down.
Then, less than four months after losing his job, the same broker, who had amassed more than $30,000 in debt on almost a dozen credit cards, filed for bankruptcy. He gave up his 1995 Acura Integra because he could not afford the $420 monthly payment. He no longer could spend $2,000 a month to eat in restaurants. He had to sell his belongings, except his clothes, and move back home with his parents.
“I was wiped out almost instantly,” said the former mortgage broker, who filed for bankruptcy liquidation last month. He asked that his name not be used because of the embarrassment it may cause him and his family.
He represents a new breed of debtor: individuals earning good salaries whose payment histories do not indicate they are potential credit risks.
Lenders are concerned that because of these borrowers’ good credit histories, the institutions do not figure out, until it is too late, that they are headed for financial trouble.
“What is happening is a higher percentage of people filing for bankruptcy are doing so without early warning signs,” said Kenneth Crone, vice president of Visa U.S.A. Inc.’s risk management and security division.
Meanwhile, a string of recent reports shows that a growing number of consumers are having trouble repaying creditors, including an increasing number of relatively high-income individuals. Last week, the American Bankers Assn. reported that the percentage of delinquent credit cards reached a record 3.66% of all accounts in the April-June quarter--up from 3.26% for the same period a year earlier.
The second quarter’s credit card delinquency ratio is the highest the ABA has reported since the trade association began collecting such data in 1974.
On the other hand, some banks have updated their models to a world of easy credit and say they can tolerate a higher rate of loss in return for more interest-paying customers.
But in addition to a rising credit card delinquency rate, the ABA found that 2.32% of eight types of “closed-end” installment loans, such as home equity and auto loans, were past due in the quarter, up from 1.95% last year.
Earlier in the month, the Federal Deposit Insurance Corp. reported that bank credit card losses rose to their highest level since 1992, in part because of a rise in personal bankruptcy filings and corporate downsizing. Personal bankruptcies are projected to hit a record 1 million this year.
In a survey by Visa, the credit card company found that of individuals who had filed for bankruptcy during a 12-month period in 1995 and ‘96, nearly 29% said the precipitating factor was excessive spending rather than family or professional emergencies.
“What we are seeing is that people who were good credit risks, had good incomes and a good payment history are filing for bankruptcy,” said Fred Winkler, executive vice president for First Union Corp.’s card products and electronic banking division.
Winkler said he is finding that a number of borrowers in trouble have been “downsized” into jobs paying less. But instead of cutting back, borrowers, who continue to be bombarded with credit card solicitations, often use credit to maintain a lifestyle they can no longer afford.
With easy access to credit, many consumers are able to live longer on debt before a major crisis causes financial trauma. Often these borrowers continue to make minimum payments and therefore don’t send up red flags to lenders.
