Consumer Credit Performance Continues to Weaken As Card Chargeoffs Soar

Recent reports from various government and private sector sources point to continuing increases in consumer credit delinquencies, especially in credit cards, a trend that no one expects to end any time soon.

Delinquencies are likely to continue rising because unemployment is likely to continue rising, providing consumers with fewer resources to come current on their credit card bills. However, they’re likely to do what they can so they can at least keep their credit cards, according to Dan North, chief economist at Euler Hermes ACI, a trade credit insurance firm. “You can buy milk with your credit card. You can’t do that with your mortgage. Consumers will do anything to keep their credit cards going.”

The consumers who don’t use their cards for such necessities are sharply reducing their usage of credit due to concerns over their jobs and the economy as a whole, and are increasing their savings rates, North adds. While increased savings is good for the long-term health of the economy, right now the economy needs more spending to emerge from the current doldrums, he said.

“Everyone is nervous right now,” North said. “A lot of things are being driven by fear.”

One of the biggest fears is that of job loss. Beyond the relatively straightforward increase in the unemployment rate is underemployment of part-time workers and of full-time workers who are working fewer hours now, but don’t show up in the government’s monthly unemployment reports. The next official government report comes out Friday, said Dimitri Michaud, consumer finance analyst at Kaulkin Ginsberg, a strategic advisor to the accounts receivable management industry and a sister company of insideARM. Michaud, like North doesn’t expect jobs, the economy or delinquencies to get better any time soon.

Indeed, ADP Wednesday released its monthly job data, which typically serves as an accurate predictor of the Department of Labor report that immediately follows. ADP, a payroll processing company, said that the U.S. lost 697,000 private sector jobs in February, the most the company has ever reported in a single month.

According to the Federal Reserve, the seasonally adjusted delinquency rate for all bank loans increased to 4.6 percent -- the highest level since 1992 -- in the fourth quarter of 2008, up from 3.7 percent in the third quarter. The delinquency rate at the end of 2007 was 2.4 percent.

Consumer credit card delinquencies shot up to 5.6 percent in the quarter, up from 4 percent at the end of the third quarter.