Mortgage Payments Could Make Credit Card Balances Soar

In the current economic environment, a new online payment service announced by last week by ChargeSmart LLC ("New Program Allows Consumers to Pay Mortgage with Credit Cards," July 10) could lead to an increase in receivables, and therefore, in risk for credit card issuers, according to an industry analyst.

ChargeSmart’s online payment service enables consumers to pay their mortgage, auto and student loans with their credit cards. The service works with Visa and MasterCard issuers and a network of more than 4,000 billers across the country.

Users of the service will pay a transaction fee of $4.95, plus 2.29 percent of the amount charged. Those fees go to ChargeSmart. If the borrower defaults on the credit card payment, that’s an issue between the cardholder and the card issuer, according to Mitch Friedman, one of the ChargeSmart founders.

“People are feeling stretched, so [the service] has an opportunity to take off,” said Dimitri Machaud, Kaulkin Ginsberg consumer finance analyst. “A major concern would be the shift [up] in credit card receivables.”

Any of the loan payments the service is designed to handle can run from a couple of hundred dollars a month to a couple of thousand dollars a month, Michaud explained. “The mortgage payment is usually the largest transaction a person has each month. This shifts the entire average monthly credit card bill much higher. And most people don’t pay off their entire bill each month, they tend to carry a balance.”

With people financially strapped with the rising cost of food and energy — The Producer Price Index for Finished Goods increased 1.8 percent in June, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported Wednesday — they are looking for the ability to put off payments, even though they may pay fees for the ability to do so, Michaud said.

Friedman had said the same thing, pointing to the success of the IRS program accepting credit cards.

Credit card balances are already on the rise. According to Fitch ratings, credit card charge-offs and delinquencies rose rapidly in the fourth quarter of 2007 and are expected continue to deteriorate in 2008 as highly leveraged consumers contend with falling home prices, rising unemployment levels, and higher energy prices.

Many issuers who had provided full year credit guidance in fourth quarter earnings calls revised or withdrew credit expectations at the end of the first quarter as portfolio statistics worsened and economic indicators provide no clear indication of stabilization. Fitch believes credit metrics will continue to deteriorate over the balance of 2008 and potentially into 2009. The degree of deterioration will be dependent upon the duration and severity of an economic downturn and an issuers’ ability to manage portfolio growth, control exposure to unused credit lines, and collect delinquent accounts.