Credit Card ARM Inventory to Remain Strong as Charge Offs Spike

Credit card delinquencies were up in the fourth quarter due to seasonal factors, while charge-offs increased to a new record high in January, according to the latest reports from TransUnion and Moody’s Investors Service.

TransUnion’s quarterly analysis of trends in the credit card industry revealed that the national credit card delinquency rate -- the ratio of bankcard borrowers 90 days or more delinquent on one or more of their credit cards -- increased to 1.21 percent in the fourth quarter of 2009, up 10 percent over the previous quarter. Year over year, credit card delinquencies remained flat.

Meanwhile, Moody’s reported that credit card charge-offs advanced above 11 percent in January, for the first time ever, to 11.15 percent. The ratings agency predicted that credit card charge-offs will peak at close to 12 percent in the next several months.

Moody’s also reported that the delinquency rate – which it calculates as payments more than 30 days late -- dropped to 5.96 percent in January, the first month below 6 percent since September. The amount of a cardholder’s balance paid slid to 17.53 percent in January after increasing in December.

The more that charge-offs increase, the better the picture for delinquencies because the amount charged off is no longer included in the delinquency calculation, noted Ezra Becker, director of consulting and strategy in TransUnion's financial services business unit. He pointed out that the amount of new credit being awarded is also shrinking as card issuers reign in credit lines.

Higher charge-off rates mean more work for accounts receivable management firms that focus on credit card accounts. ARM firms are already reporting a massive inflow of new work. In insideARM’s latest Credit & Debt Collection Industry Confidence Survey, more than 60 percent of collection agency respondents reported a moderate or significant increase in account placements. Further, nearly 75 percent expect placement increases over the next year.

Becker added that the increase in delinquencies in the fourth quarter was primarily due to holiday shopping. “Consumers decided to use the credit for gifts and take on short-term delinquencies,” he said.

The increase in delinquency between the third and fourth quarters of 2009 is in line with what TransUnion saw at the end of 2008.

Becker expects most of the increase to be paid down in the coming months as people get tax refunds and wage increases. “There are fewer companies doing it, but there are still salary increases and bonuses out there,” he said.