Credit Card Charge-Offs Hold Steady, But Weakness Seen in Future

Ratings agency Moody’s mid-year credit card performance review shows several areas of concerns for the credit card industry. The report, issued earlier this week, cites charge-off rates, delinquency rates and payments as area of continued weakness in the industry.

Bankruptcy filings, which are rising after a one-year hiatus thanks to the change in bankruptcy laws, continue to drive larger charge-off rates in conjunction with increasing unemployment, the report says.

In July 2008, the charge-off rate index was 6.36 percent, down slightly from 6.46 percent in June. But the long-term trend of rising charge-offs is expected to persist. The June figure was the highest rate since December 2005.

In August 2008, the unemployment rate rose to 6.1 percent, the highest it has been in nearly five years. Credit card charge-off rates are highly correlated with the unemployment rate, especially when the unemployment rate is on the rise, the report added.

Early stage delinquency rates have remained stable; however, the proportion of the late stage delinquencies remains comparatively high, the report said. So the later a debtor is on payments, the less likely he or she is to catch up.

On the bright side for credit card issuers, risk-based repricing and the presumed increase in late fee revenues (as delinquency rates have risen) have helped support credit card yields while interest rates have fallen, according to the report.

Even though yields are increasing, payment rates are decreasing. In July, the payment rate index was 18.21 percent -- more than a point-and-a-half lower than a year ago. The payment rate index is a measure of cardholders' willingness and ability to repay their credit card debt. So the higher the payment rate, the stronger the credit, all else being equal, according to the report.