Credit Card Performance to Deteriorate in 2008 says Fitch

Fitch Ratings issued a negative 2008 outlook for consumer finance, saying in a report released Thursday that credit card performance will “noticeably deteriorate” in the coming year on spillover from the residential mortgage fiasco, weaker economic trends and higher unemployment.

The report “Credit Cards: Asset Quality Update,” points to Federal Reserve data that shows consumer credit continues to rise, amounting to $2.5 trillion at the end of October, with revolving credit consistently accounting for 36.5 percent of total debt. But the Federal Reserve said revolving debt grew in recent months because the mortgage crisis had limited access to home equity loans, which many consumers use to consolidate debt ("Credit Card Spending Explodes in November," Jan. 9).

“With $922 billion in revolving credit outstanding, according to the Federal Reserve, the highly leveraged consumer, as measured by a rising financial obligations ratio, will continue to be pressured in 2008,” Fitch said.

Fitch said asset quality began to deteriorate in the second half of 2007, although delinquencies remain below historical lows. Delinquencies of 60 days or more on prime accounts stood at 2.8 percent in November 2007, below the 10-year average of 3 percent. Subprime delinquencies amounted to 4.9 percent, below the 10-year average of 6.7 percent, the report said.

In addition to the mortgage crunch, new bankruptcy legislation has played a role in increasing delinquencies, Fitch said. “Consumers who would have qualified for bankruptcy in 2005, must now roll through delinquency buckets before being charged off,” Fitch said

While credit card asset quality deterioration beyond Fitch’s expectations could be a driver of negative rating action in 2008 for mono-line credit card issuers, many of the largest credit card issuers benefit from business line diversity. “Thus weakness in credit cards, by itself, is unlikely to be a rating issue,” Fitch said.