Credit Card Delinquencies Drop As Charge-Offs Continue to Rise

U.S. consumer attitudes toward the economy have continued their trend of pessimism and deterioration throughout the year, with no immediate sign of reversal.  Aside from the continued slide of the housing market, other factors including job security – with the current unemployment rate standing at 5.5 percent – have left many households feeling vulnerable when assessing their financial situations.

With good reason, the issue of the rising cost of food and fuel has continued to make headlines.  And now with gasoline prices above $4.00 a gallon nationally, many consumers are tightening budgets as a response.  

How likely consumers are to dramatically reduce discretionary spending is still up in the air, but from the recently released consumer credit report by the Federal Reserve – known as the G.19 – it would appear that a possible slowdown may indeed be underway.  In the Fed’s report detailing credit expansion in April, credit card debt grew at a mere 0.4 percent, down from the 7.4 percent annual growth rate seen in March and the 6.8 percent annual growth rate seen in the first quarter of 2008.

Though slowed in this recent Fed report, it is highly unlikely that credit card spending will continue to see any significant or sustained slowdown. This is due, in part, to both a continued shift in consumer payment preference towards credit cards as well as the continued rise in the cost of necessities such as fuel, which has risen 29 percent over the past year.  

As a result, though discretionary spending will probably see moderate declines, consumer spending on household expenses is likely continue to rise.  

In total, credit card debt in the U.S. stood at $956.9 billion at the end of April.  This is an important figure to keep in mind when discussing outstanding credit card debt and debt quality.  A good barometer of the overall market is the U.S. Credit Card Quality Index (CCQI) – an index tracked by Standards and Poor’s that monitors the performance of receivables held in master trusts of bank card and credit card backed securities – which in April had aggregate outstanding receivables of $430.8 billion held in 22 master trusts.

In April the charge-off rate for the CCQI rose to 5.9 percent from the March rate of 5.7 percent.  This was an increase of more than 34 percent from the 4.4 percent charge-off rate reported in April of 2007 and demonstrates the challenges being faced by creditors to effectively collect on outstanding credit card debt.

Over the past year delinquencies, like charge-offs, have trended upward. But in the most recent report the delinquency rate among credit card trusts in the CCQI actually decreased from 4.5 percent in March to 4.4 percent in April.

This decline in the index delinquency rate could reflect several possible developments, but a likely cause could be increased efforts on the part of creditor recovery departments in response to the current credit environment.  With increasing charge-offs across a broad spectrum of credit types, heightened pre-charge off recovery efforts is the most likely cause of the dip in delinquencies.

Hitting on a similar note as the results of the CCQI, for the first time since the beginning of 2007 average national credit card loan delinquencies – defined as the ratio of borrowers 90 or more days past due – experienced a relevant quarterly decline, according to TransUnion’s quarterly credit card analysis.  Nationally, the ratio of credit card borrowers delinquent on one or more of their credit card accounts declined to 1.19 percent in the first quarter, down 12.5 percent from the previous quarter.

Though a statistically significant decline from the ratio of delinquency seen in the fourth quarter of 2007, the first quarter 2008 total still remained higher than the previous year’s first quarter ratio of 0.91 percent.

This development may signal, as stated by Ezra Becker, principal consultant in TransUnion’s financial services group, that “consumers have begun to take stock of their overall debt and begun to catch up on their repayment schedules.”

Another possibility is that consumers have continued to shift their payment hierarchies and have placed a greater emphasis on making their credit card payments.

In addition, although the CCQI in April witnessed a moderate decline, the overall rate of 4.4 percent was still almost 19 percent higher than the 3.7 percent delinquency rate reported for April of 2007.  The 4.4 percent rate was also an increase of almost 13 percent from the 2007 overall average of 3.9 percent.

As a signal that difficult times were likely to continue, TransUnion stated that it expected the delinquency rate to edge back up for the remainder of the year as increases in fuel prices would continue to add to the overall financial burden of consumers.

Dimitri Michaud analyzes trends in strategic receivables management within the consumer finance sector, including the banking, credit card and mortgage markets. He conducts research, writes publications and hosts a regular blog on insideARM.com for Kaulkin Media.