Credit card crunch

Banks in the US are facing new troubles. Consumers who can no longer pay their bills, their mortgages, or debt run up on their credit cards threaten to trigger a tsunami of credit defaults.

The estimated $80 billion (56 billion euros) in outstanding credit card debt could upset the liquidity of credit card companies and banks, warns John Ulzheimer, a credit card expert at the consumer website credit.com.

"Today, the value of homes is going down rather than up, so there really is no equity to pull out of homes to pay down credit card debt," he says.

"What you end up with is a consumer with a large amount of credit card debt, no equity in the home to fall back on, an increasing unemployment rate – and all of these things together really spell disaster, not only for the card-holder, but also for the credit card issuer."

What about Europe?

In most European countries, including Germany, banks are less worried about consumer debt, because people use their credit cards differently. They generally do not use their cards to bankroll a lifestyle they cannot afford.

To be on the safe side, German banks, Deutsche Bank and Commerzbank, have each set aside one billion euros for credit defaults, a drop in the bucket compared to the US.

It's a mentality issue, says Matthias Hoehnisch, director of credit card business at Germany's National Savings and Loan Association. Customers in Germany behave differently to customers in America.

"We have noticed that many German customers exercise a very strong controlled behavior," Hoehnisch said. "Using credit cards to roll over debt is not done in Germany."

Pay as you go, or charge it

In the US, consumers have what are called "revolving cards," which allow users to re-pay only a fraction of the debt they have run up on their credit cards.

In most of Europe credit cards are so-called "charge cards," according to Peter Ehmke, managing director of Mastercard Germany. In Germany 90 percent of credit cards are charge cards, he added.

"That means all the costs put on the card are repaid in full at the end of the month," Ehmke says. "It's different in America, where only five, six, or seven percent is paid back monthly. The rest is left on the card and naturally mounts over time, if you don't keep an eye on it. That doesn't happen in Europe."

With the exception of Britain, which largely has the American-style system, European bank customers have a checking account that permits a certain level of overdrafts – in other words a moderate line of credit, rarely more than a few thousand euros.

An American's line of credit runs over the credit card and is much more substantial, easily reaching tens of thousands of dollars on perhaps four or five credit cards simultaneously. Most experts agree, it is a bubble just waiting to burst, but the explosion will scarcely be felt in Germany.

Author: Michael Braun/Gregg Benzow
Editor: Nancy Isenson