I was searching for some information about my credit card the other day and I accidentally stumbled upon a collection of interesting documents. They are the offering documents for Bank of America’s borrowing backed by its credit card receivables. Bank of America lends money to credit card holders. It borrows the money from the capital market for the funding. The instruments they issue for the borrowing are the so-called Asset Backed Securities (ABS). While I’m not interested in or qualified for purchasing these particular securities, the offering documents offer a great under-the-hood view of a credit card receivable portfolio.
There are many documents. I’m just using a recent prospectus for BAseries Class A(2007-13) Notes as an example. It’s a huge document, 232 pages. Most of the interesting data start on page 24. Here are some of my observations:
– 55 million credit card accounts owe Bank of America $94 billion. The average balanced owed is $1,719. 60% of the accounts don’t carry any balance. Another 28% of the accounts have balance under $5,000. The average balance owed for accounts which carry a balance is $4,311. (p. 29)
– 5% of accounts, carrying balances over $10,000 each, are responsible for 50% of the balances owed. I’m sure there are some App-O-Rama participants in there, but most of these 5% are probably paying good interests to the bank. (p. 29)
– Cardholders on average pay back 17% of the principal owed in any month. This “principal payment rate” actually increased from 13.6% five years ago. (p. 27)
– The bank writes off 5% of the portfolio every year because the cardholders are more than 6 months late, declare bankruptcy, die, or are fraudulent. Prosper.com lenders should be prepared for at least this level of credit loss. (p. 25)
Contrary to what people might think, it’s not easy to be a credit card lender. Funding costs the bank LIBOR + 22 basis points, currently about 5.25%. Charge-offs cost another 5%. That means the bank has to charge at least 10% interest before covering fixed costs.
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This cracks me up… I reviewed my monthly statement from Discover yesterday and I saw that they bump’ed my interest rate from 16% to 22%. I called and asked why and the response was, “Discover needed to ajust my rate to stay competative with other lenders.”
I closed my account.
It’s crazy out there.
Some quick figuring — correct mistakes please:
$94 billion owed/$1719 avg bal = ~54 million accounts
Avg balance carried = $4311 * 0.135 (average interest rate on bankrate.com) = ~$582/customer * 54E6 * 0.4 = ~$12.57 billion interest income per year.
Not bad. I think I could live on that.
Of course, not included in this are other fees such as annual fees, late fees, over limit fees, etc. I’m sure that’s a big number for their bottom line.
Another way: That’s only ~$233 interest earned per customer, per year.