Credit Card Charge-Offs Continue Marching Higher: Fitch

Chargeoffs and delinquencies are continuing to rise, according to FitchRatings’ latest issue of Credit Card Movers & Shakers. In July, credit card chargeoffs were up 40 percent over the same time a year ago, while delinquencies are up 21 percent. 

For the month, the chargeoff rate on prime credit card trusts tracked by Fitch was 6.43 percent and 60 days + delinquencies were 3.10 percent. The annual and monthly figures indicate continuing weakness in the economy, according to Fitch. “Bankruptcies are still exhibiting a gradual increase form historic lows, while credit card delinquencies have been increasing at a faster pace, as revolving credit card usage continues to grow,” the company wrote in the report.

“Coming off a two-year period of exceptionally strong performance following the Bankruptcy Act of October 2005, card portfolios have some cushion before breaching historical performance levels,” said Fitch managing director Gary Santo in a prepared statement. “However, economic pressure, increased borrower debt reload rates and lack of alternative debt refinancing options are steadily chipping away at that cushion.”

Among concerns the report highlights are a rising unemployment rate, which hit a four-year high in July; declining consumer confidence, which hit a 16-year low in June; and retail sales, which, though up 2.6 percent in June, were boosted in large part by federal economic stimulus checks. Those payments have now been used, so the June boost could have been temporary.

The weakness in the subprime consumer credit card market continues, the report cautions. Subprime credit card chargeoffs rose 47 percent over the same period a year ago, while delinquency rates were up 24 percent. The subprime chargeoff rate for July was 13.01 percent, while the delinquency rate was 5.86 percent. Revolving credit outstanding increased at an annualized rate of 7.1 percent, according to the Federal Reserve, following an increased of 6.8 percent during the first quarter.

Chargeoff rates in Fitch's prime credit card index have risen for nine straight months, up 40 percent from July 2007.  Fitch expects chargeoff rates in the prime credit card segment to approach the high end of historically observed performance averages, meeting or exceeding 7 percent by the end of the year.

Of equal concern, according to Fitch, are the monthly payment rate (the ability of a borrower to repay their credit card debt) and gross yield (the rates and fees which banks charge borrowers), both of which are also showing signs of deterioration.

The retail chargeoff rate has also risen, according to the report, continuing a trend of 100 to 150 basis point increases every three to four months, a trend that started in the middle of last year, when chargeoff rates were at 5.5 percent. Fitch continues to expect retail chargeoffs to climb slowly in the next few months, with yields remaining stable.