The default rate for credit cards is getting out of hand, and the reform bill should cause it to go even higher.

(Reuters) - U.S. credit card defaults rose to record highs in May, with a steep deterioration of Bank of America Corp's (BAC - News) lending portfolio, in another sign that consumers remain under severe stress.
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Bank of America Corp -- the largest U.S. bank -- said its default rate, those loans the company does not expect to be paid back, soared to 12.50 percent in May from 10.47 percent in April.

The bank is paying the price of expanding rapidly in recent years and of holding one of the highest concentrations of subprime borrowers among the top card issuers, analysts said.

In addition, American Express Co (AXP - News), which accounts for nearly a quarter of credit and charge card sales volume in the United States, said its default rate rose to 10.4 percent from 9.90, according to a regulatory filing based on the performance of credit card loans that were securitized.

Credit card losses usually follow the trend of unemployment, which rose in May to a 26-year high of 9.4 percent and is expected to peak over 10 percent by the end of 2009.

If credit card losses across the industry surpass 10 percent this year, as analysts and bank executives expect, loan losses could top $70 billion.
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Credit card lenders are trying to protect themselves by tightening credit limits, raising standards and closing accounts. They have also been slashing rewards, increasing interest rates and boosting fees to cushion against further losses.

But that could come to an end soon. The U.S. government approved a law last month limiting credit card fees and interest rates, which is expected to tighten lending further and ultimately boost defaults as consumers find it harder to refinance their debts.

To put this into perspective, let's recall the 2005 Bankruptcy Law that banks and credit card companies pushed so hard to get into effect.

(CNN/Money) - A new bankruptcy law goes into effect today, making it harder for consumers to prove that they should be allowed to clear their debts in what's known as a "fresh start" -- or Chapter 7 -- bankruptcy.

And those who file will be paying much higher fees to bankruptcy attorneys, who are expected to raise their rates by as much as 100 percent.

You might remember how the banks and credit card companies spent millions of dollars lobbying Congress, who passed the law in the middle of the night like the cowards they were.

Hundreds of law professors and judges tried to weigh in, testifying before Congress and signing letters denouncing the proposed reforms. But they were no match for the coalition of credit card companies, auto lenders and home mortgage providers who claimed that many Americans who filed for bankruptcy—a record two million families in 2005—were abusing the system.
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But in February, the National Association of Consumer Bankruptcy Attorneys published a survey called “Bankruptcy Reform’s Impact: Where Are All The Deadbeats?” The association asked 10 leading credit-counseling agencies to provide data on the debtors they had begun seeing in October, and received a complete response from six. They found that less than five percent of their 60,000 debtors had sufficient funds to pay off their debt even under a Chapter 13. Nearly 80 percent had been driven to bankruptcy by medical illness, divorce, the loss of a job, or another force beyond their control.

Instead of the new law targeting deadbeats, it has targeted the poor, just like consumer advocates said it would.

Well, it turns out that this law passed to reward Wall Street greed has in fact backfired upon them, just like consumer advocates said it would.

The credit card quality continued to deteriorate for a number of reasons. First, credit card lenders happily filled the void left by less access to mortgages starting in early 2006, as my colleague Tim Westrich and I documented in a report for the Center for American Progress last year. Credit card lenders expanded their business when everybody who had paid any attention knew that the overall credit quality was already deteriorating.

Second, people borrowed money because they had to. The argument that all forms of household debt, including credit cards, were caused by irresponsible borrowers has never jibed with the data. For instance, data from the Federal Reserve’s Survey of Consumer Finances show that families became less accepting of debt for conspicuous consumption over time. Also, irresponsibility cannot explain why the growth rate in debt abruptly changed after 2001. Interest rates after all fell much more slowly in the 2000s than in the 1990s. And finally, people would have to plaster the walls of their homes with plasma screen TVs, have a different iPod for every day of the year, and rent out storage units for all of their new designer wardrobes to explain the enormous additional debt that families have taken on.

Third, credit card companies milked every last dollar out of their preferred customers, the so-called “revolvers” – people who carry a balance and make some payments. Higher interest rates, increased fees, and fewer perks were typically in store for these card holders when defaults surged. The only problem with this strategy is that it will lead to an acceleration of credit card default, especially in a recession. Still, a number of credit card companies are raising their fees, cutting back on perks associated with their cards, and raising interest rates right now, even though consulting firms already estimate that the average chare off rate could go as high as 8 percent to 9 percent this year. Apparently, bilking the customer in the current quarter beats making sure that the customer can still pay the bills next quarter.
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The worst part of this crisis is that it was foreseeable. For decades, credit card companies have layered fees and excessive interest rates on their borrowers. Instead of addressing the consequences of high, complex, poorly understood credit card costs, though, the high default rates were simply explained away by declaring defaulting borrowers as deadbeats. Now that there won’t be another round of bankruptcy reform that could be sold as salvation, credit card lenders will have to come to terms with the fact that their practices were actually detrimental to their own financial health.

When I was growing up I noticed that the more credit cards people had, the more money problems they had. The connection between those two items was so clear that I am certain that only collective insanity in today's society could have blinded people from this.

Another issue of credit cards is the constant financial strain from carrying debt. Debt is like an invisible chain. You can't afford quit your job, you can't afford to do a lot of things. Your options are limited. It's why the terms debt and slavery have been used interchangeably throughout history.

That's why I've never owned a credit card and have never wanted one. Thus I haven't had money problems since I started my career.

Sure, everyone with credit cards always claims that they don't carry debt. It's sort of like talking to people who go to Las Vegas. For some reason you can never get anyone to admit that they lost money in Vegas, yet the casinos keep getting bigger.

In the end the thieving and greed of the credit card companies should discourage people from ever having a credit card.
People will reject revolving debt in the same way that people who lived through the Depression rejected the stock market and banks. It will be a generational thing.