US Credit Card Performance Deteriorates Again in February
Credit card performance deteriorated further in two important metrics in March, but not by enough for any immediate rating implications for credit card asset-backed securities, according to Moody’s.
The charge-off rate is now the highest it has been since December 2005, when charge-offs temporarily spiked due to a change in the consumer bankruptcy law, Moody’s said. “The normalization of bankruptcy filings and economic headwinds will most certainly continue to increase charge-off rates throughout the year and, perhaps, into 2009.The charge-off rate measures those credit card account balances written off as uncollectible as an annualized percent of total loans outstanding. The rise in February marks the fourteenth consecutive month of year-over-year increase and the fifth consecutive month of month-over-month increase.”
At 5.59%, the February charge-off rate is just above the long-term average of about 5.5%, Moody’s said. After the 2001 recession, charge-off rates eventually reached 7.05% in May 2003, according to figures tracked by Moody’s Credit Card Index. As in the 2001 recession, the rising trend in charge-off rates following the 1991 recession significantly lagged (by more than a year) the official periods of business cycle contraction.
If the current economy significantly slows or contracts, charge-off rates may not peak until sometime in 2009.
Moody’s “believes that fundamental differences in credit underwriting standards, risk management, issuer credit strength, and macroeconomic drivers explain why the credit card sector does not appear to be following the downturn in the sub-prime mortgage sector at this time.”
The delinquency rate, which can be an early indicator of future charge-off rates, is also on the rise. In February, this rate was 4.53%, the highest it has been since March 2004.
Interestingly, though, the early-stage delinquency rate (i.e. card balances less than 30 days past due) has been relatively stable for the past six months; however, the late-stage delinquency rate (i.e. card balances 90 days or more past due) continued to rise, Moody’s said. “This apparent dichotomy between the trends in early- and late-stage delinquencies may be indicative of an ever more challenging collection environment. That is, once cardholders fall behind in their credit card payments, it is increasingly difficult for them to re-obtain “current” status.”
More details and other metrics are available in Moody’s report U.S. Credit Card Performance Mixed in February.
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