Credit Card Payment Performance Improves
Saturday, August 22, 2009
Credit card charge-off rates, which measure balances that banks have given up on collecting, dropped for the first time since September, according to a Moody's report released Friday.
The charge-off rate on U.S. cards for July was 10.52 percent, down from a record-high of 10.76 percent in June. The overall delinquency rate, which measures the proportion of accounts that are more than 30 days past due, also dropped to 5.73 percent in July, it's lowest level all year, from 5.81 percent in June. It was the delinquency rate's fourth consecutive month-to-month drop.
The news provided a glimmer of hope for the battered credit card industry. But analysts warned that a turnaround could still be far off. Charge-off rates are strongly linked to unemployment. If unemployment continues to rise, as economists expect, more Americans will be unable to pay their debts, which means banks will have to take more losses. Unlike in past years, borrowers don't have home equity or plush retirement accounts to tap into to pay off their credit cards.
"It's good that charge-offs have slid back a bit, but they're still very high," said Nessa Feddis, vice president and senior counsel at the American Bankers Association.
Charge-offs are a vexing problem for banks still trying to recover from the mortgage meltdown. Feddis said the ABA expects banks to suffer more losses this year. "The projections are they will continue to lose money at least through 2009 and possibly into 2010," Feddis said.
Moody's did not change its projection that charge-off rates would peak in mid-2010 at 12 to 13 percent, when the unemployment rate is expected to reach 10 to 10.5 percent.
William Black, senior vice president at Moody's, said the drop in the July delinquency rate could have been seasonal. Historically, borrowers become less delinquent around April, when they get their tax refunds. That effect usually lingers for a few months. "Delinquencies will again increase in the second half of the year as they normally do," he said. "There's more competition for household wallet share in the second half of the year with back-to-school spending as well as the holiday season."
Charge-off rates will follow suit, he said.
David Robertson, publisher of the Nilson Report, which tracks the industry, said there was another reason for the recent drop in uncollectible debts. Card companies aggressively pursued delinquent customers starting about a year ago, and took their losses then. "The aggressiveness has really purged from their portfolios those accounts that were either dead or not worth saving," he said.
Now they are left with less-risky customers who can spend. But the unemployment rate and precarious economy are discouraging them from spending. Couple that with a new credit card law that will restrict banks' ability to raise interest rates and fees, and the future for the industry is unclear, analysts said.