Credit Card Chargeoffs and Delinquencies Contracting Over Summer

Credit card delinquencies and chargeoffs are beginning to ease, which analysts say is a result of tighter credit standards by card issuers and consumers cutting back on card usage for discretionary purchases.

Late last week, rating agency Moody’s said that the charge-off rate on U.S. cards in July was 10.52 percent, down from a record-high of 10.76 percent in June. The overall delinquency rate fell to 5.73 percent in July -- the lowest level all year -- from 5.81 percent in June.

TransUnion confirmed the trend Tuesday. According to the Chicago-based credit reporting agency, the national credit card delinquency rate fell to 1.17 percent in the second quarter of 2009, down 11.36 percent over the previous quarter. Year over year, credit card delinquencies increased 12.5 percent from 1.04 percent in the second quarter of 2008.

The Moody’s report considers delinquencies as accounts more than 30 days late, while TransUnion uses 90+ days late as the standard for delinquencies.

Average credit card borrower debt (defined as the aggregate balance on all bank-issued credit cards for an individual bankcard borrower) drifted downward nationally 0.98 percent to $5,719 from the previous quarter’s $5,776, but was up 1.74 percent compared to the second quarter of 2008, according to TransUnion.

“The credit card issuers are closing inactive accounts and reducing lines of credit,” said Ken Alverson, managing director, Novantas, a New York-based financial services management consultancy. “They’ve also been a lot more selective about growth. They’re using FICO scores and other data to send offers to only the most creditworthy and profitable customers.”

Alverson said that the credit card issuers are also using analytics to do a better job of balancing revolvers – who bring in interest, late charge and other revenue, but also are higher risk – with high spenders who pay off most or all of their balance every month. The latter group provides more to the issuers in interchange fee profit while being less risky, but don’t provide as much in interest and related revenues.

While many ARM companies are working excess volume this summer, this data suggests that supply of  paper available for collection can contract at some point in the future, according to Paul Legrady, director at advisory firm Kaulkin Ginsberg.