Credit company Advanta Corp. just recently cut off new charges on their credit cards as the economic slump continues. Advanta is a niche credit institution focusing mainly on small business borrowers. Industry analysts say what happened to Advanta was worrying but not unexpected.
The credit industry is considered one of the most affected sectors in the on-going economic crisis. According to estimates, the credit card debt of the nation is approaching the $1 trillion mark and is threatening to be the next financial collapse. According to a statement released by the federal government just last week, of the 19 major banks in the U.S., 12 may experience a loss of $82.4 billion at the end of the year if the federal government's 'worse-than-expected” economic scenario proves true.
The credit industry itself knows what it is facing. Jamie Dimon, chief executive of financial giant JPMorgan Chase & Co, referred to its credit-card business in Wilmington as its “biggest conundrum”. Fitch Ratings analyst Chris Wolfe considers that losses on consumer credit cards might exceed outstanding loans by 10%. Such a loss rate would be the worst in the industry ever since credit companies began reporting separately on credit cards during the 1990s.
The credit-card crunch has seemingly hit all sectors of society. Credit card debt seems to be a prevalent problem no matter what particular sector the cardholders belong in. Red Gillen, Celent senior analyst in San Francisco, recently stated that: “The credit-card industry is seeing rapidly increasing charge-offs across the board no matter who the cardholder is.”
In the case of Advanta, their focus was on the small business sector. Gillen said that Advanta's situation is unique mainly because of its particular sector, small businesses. However, it is a problem that the entire credit industry is suffering from, although Advanta's case is more along the extreme end.
Chris Wolfe recently said, “We have expected to see credit-card losses accelerate, and they have. I think Advanta is a bit more affected because of their niche in small business.”
Advanta stated last Monday that cutting off new charges was its attempt at preserving available capital which the company will need to absorb its losses and to help the company survive the economic crisis.
CardRatings.com founder, Curtis Arnold refers to Advanta as a bellwether for small business credit cards. Its recent troubles may therefore be warning signals of a growing crisis in the small business sector. CardRatings.com provides credit-card information online.
Referring to what is happening in Advanta, Arnold said, “I think the main thing to take away here is that the small business credit market has taken a significant step backward with this, what I would consider to be, shocking news.”