Credit Card Spending Growth Continues Unabated As Do Charge-Offs and Delinquencies

Though consumer sentiment regarding the economy is at all time lows and an increase number of households are expecting to cut back on expenses, U.S. consumer spending has yet to show signs of a significant slowdown.  In the Federal Reserve’s monthly release of consumer credit – known as the G.19 – the Fed reported that Americans added $15.29 billion to total outstanding credit debt in March, an annual rate of 7.2 percent compared to the 3.1 percent annual rate seen in February ("Consumer Credit Surges in March, Defying Expectations," May 8).

In particular, revolving credit or credit card related debt expansion was sharpest growing at an annual rate of 7.9 percent compared to non-revolving credit that grew at 6.8 percent.  A continuation of increased credit card spending was evidenced with Americans adding $6.3 billion to outstanding credit card debt in March.  At the end of the month total credit card debt in the U.S. stood at $957.2 billion.

This greater than expected increase in consumer credit debt and in particular credit card debt, was a clear indication that Americans are continuing to experience difficulty in paying for goods and services and as a result have increased credit use to make ends meet.  Though this alleviates some of the concern over a sharp decline in discretionary spending by consumers, as the broader economic picture remains glum this increased reliance on credit, and particularly credit card transactions, has been accompanied by increased charge-off and delinquency rates.

As the first quarter of 2008 came to an end the upward trend in charge-offs and delinquencies witnessed throughout 2007 in outstanding credit card balances continued as consumers struggled to pay their debts in the face of the increased prices for necessities, particularly food and fuel.

Aside from individual credit card issuers, this upward trend has also been witnessed within such indices as the U.S. Credit Card Quality Index (CCQI) – an index tracked by Standard and Poor’s monitoring the performance of receivables held in master trusts of rated bank card and credit card-backed securities.

In March the CCQI charge-off rate rose to 5.7 percent, an increase of 9.62 percent from February and an increase of over 32 percent from the 4.3 percent charge-off rate reported in March of 2007.  The 30-and-60-plus day delinquency rate stayed steady at 4.5 percent from February to March, but saw an increase of 18.42 percent from its mark in March of 2007 as it climbed from 3.8 percent to 4.5 percent.

Likewise, continued deterioration in credit quality was also evident in the first quarter results of the largest U.S. credit card issuers such as Bank of America, JPMorgan Chase and Citigroup.  Most recently HSBC – among the list of top ten largest issuers with outstanding receivables of $28.93 billion – saw its credit card charge-off rate rise to 9.86 percent, up from the 8.17 percent reported in the fourth quarter of 2007.  Their 30-day plus delinquency rate increased to 5.87 percent, up from 5.77 percent in the same period.

As the probability of any significant slowdown in near-term credit card spending remains unlikely – for the first quarter of 2008 credit card debt increased at a 6.7 percent annual rate – consumers will rely more on credit and have less cash to pay down debt as energy and food prices rise, impacting collections for both creditors and the accounts receivable management industry.

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.