Credit Card Charge-Offs See Big Leap in May Year-Over-Year: Moody’s

Rating agency Moody’s reported Monday that while spread in the credit card industry remains good, collateral performance will likely get worse before it gets better. The report examines credit card charge-offs and delinquencies with an eye on rating securities backed by bank’s card portfolios.

According to figures tracked by Moody’s Credit Card Indices, spread -- the difference between revenues and expenses for a securitized transaction -- remains high from a historical perspective.

In May, the excess spread index was 7.09 percent. According to Moody’s, excess spread at this level means that “most trusts are positioned to absorb substantial further deterioration in collateral performance before hitting a performance-based early amortization event. Charge-off rates could theoretically double on an average transaction from where they are today before causing an early amortization event.”

The charge-off rate for credit card loans was 6.41 percent in May, up 37 percent from the 4.68 percent Moody’s reported in May 2007.

Moody’s also cautioned that credit card charge-offs are expected to continue to grow amid challenging economic conditions and an increase in bankruptcy filings.

Bankruptcy filings had fallen off due to the October 2005 change in the bankruptcy laws and the acceleration of bankruptcies just prior to the rule changes. Now bankruptcies are starting to be compared to more normalized previous periods and are expected to increase.

Moody’s added that early stage delinquencies remain relatively stable; however, delinquency roll rates and the proportion of late stage delinquencies remain comparatively high. That is, once cardholders fall behind on their credit card payments, it is increasingly difficult for them to become current again. The delinquency rate for credit cards was 4.47 percent in May, according to Moody’s. This compares to 3.68 percent in May 2007.

Another negative metric was the payment rate index, which at 18.6 percent rose a point from the previous month, but was still down from the same period a year ago. The payment rate is a measure of cardholders’ willingness and ability to repay their credit card debt. The higher the payment rate, the stronger the credit.

Moody’s added: “The sequential improvement in the delinquency and payment rates may have been an indirect result of the economic stimulus payments mailed to more than 130 million households. It is doubtful that this sequential improvement will continue for long if the economy does not improve in the second half of the year.”