After years of exuberant growth, the credit card issuers are suffering from high default rates. In the current faltering economy, Brazilians have never been so indebted and the default rate on credit cards has reached 27.3% in April, according to Brazil’s Central Bank.

If the default rate criteria becomes more rigid and takes into account delays on payments between 15 to 89 days, the delinquency rates jump to 38.8%. In other words, banks should have earned R$14.6 billion more than what they did.

Credit cards have always had higher default rates than other types of credit. For instance, from 2005 to 2010 the default average stood at about 24%, well above the 9% default on overdraft.

“It’s a sign that consumers committed too much of their income to service their debts,” said Claudio Felisoni, the chairman of the Retail Management Institute Foundation.

“Customers buy more because they believe that their income will keep increasing like recent years. Nobody is considering the possibility that a crisis will make them lose their jobs or income,” says University of Brasilia’s professor Newton Marques.

“The government’s repetitive saying that the interest rates are dropping caused uninformed consumers to use even more credit. Yes, interest fell on some products, but it’s almost unchanged on credit card,” says Felisoni. “Before we were thrown from the 23rd floor. Today we are thrown from the 18th. But the end result is the same.”

The problem affects especially the new middle class. In recent years, the social mobility of millions of families came with an almost mandatory accessory: the credit card in their wallets.

According to the Brazilian Association of Credit Card Companies, credit cards issued by stores and banks reached 440 million last month: it’s as if every Brazilian carried 2.3 cards in their wallets. In 2003, there were 116 million cards, or 0.6 per capita.

Source: Estado de Sao Paulo

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