Rising Chargeoffs Signal Seasonal Volatility for U.S. Credit Card ABS

NEW YORK – Reported increases in both prime and subprime chargeoffs may indicate the start of some volatility with the holiday season approaching, though it does not appear to be a major impediment to the continued stability of the U.S. credit card asset-backed securities sector, according to Fitch Ratings in their latest edition of ‘Credit Card Movers & Shakers’.

‘Consumers are still challenged by weak labor markets, high energy prices and continued Federal Reserve tightening that has tempered consumer spending,’ said Richard Drason, Director, Fitch Ratings. ‘On the flip side, an uptick in employment could prove to be beneficial and potentially relieve stress on household balance sheets.’

Prime chargeoffs rose 12 basis points (bp) to 6.13% during the August collection period, though 2004 levels are still 64 bp lower than a year ago. Subprime chargeoffs also treaded higher with a 66 bp increase to 16.24 yet remained 40 bp below 2003 levels.

Despite a 2 bp drop to 6.62% for August, excess spread is still 17 bp higher than last year. ‘With interest rates headed higher, excess spread could be pressured by rising funding costs in the near term, though improving delinquencies and chargeoffs may be a mitigant to the rising cost of funding,’ said Drason.

The latest edition of ‘Credit Card Movers & Shakers,’ which covers the latest trends in the credit card ABS market, is available on the Fitch Ratings web site at ‘www.fitchratings.com in the ‘ABS’ sector page under ‘Newsletters’.