US Credit Card Performance Deteriorated Further in April
Credit card debt performance continued to deteriorate by most measures in April, but trusts appear well positioned to withstand higher losses, Moody’s says. Still Moody’s sees continuing signs that credit card borrowers are finding it increasingly difficult to become current once they fall behind in payments.
Performance deteriorated in four of the five metrics tracked by Moody’s Credit Card Credit Indices, which tracks more than $445 billion of U.S. bank credit card loans backing securities rated by Moody’s.
There is little doubt that the credit card industry is in the midst of a challenging period and that collateral performance will get worse before it gets better, Moody’s says. “For some trusts, a further weakening of the collateral performance may put downward rating pressure on some outstanding credit card ABS ratings — especially those relating to subordinate classes. Nonetheless, with excess spread at near-historic highs, most trusts appear to be well positioned to withstand a worsening credit environment — even if losses exceed former post-recession peaks.”
The charge-off rate index continued to climb and was 6.27% in April, the highest it has been since December 2005, when charge-off rates spiked due to the change in the personal bankruptcy regulations.
Moody’s believes that the charge-off rate may be poised to surpass the peaks following previous recessions due to fundamental (i.e., challenging economic headwinds) and technical (i.e. normalization of bankruptcy filings) factors. After the last two economic contractions, in 1991 and 2001, charge-off rates peaked at just over 7%.
In April, the delinquency rate index fell month to month for the first time since mid-2007 — albeit by only seven basis points (0.07%). For the past several months, the early-stage delinquency rate (i.e. card balances one or two payments past due) has been relatively stable, while the late-stage delinquency rate (i.e. card balances three or more payments past due) has been on the rise.
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 become current on their payments again.
In April, the late-stage delinquency rate remained relatively high, but fell slightly from May. The trend in delinquency rates is often a leading indicator of the trend in future charge-off rates.
Also, the payment rate index, which is a measure of cardholders’ willingness and ability to repay their creditcard debt, fell to 17.49% in April. Until recently, the payment rate had, on average, remained within the historically high range of 18% to 20%. The rate has fallen in recent months as rising prices for necessities like food and fuel make it increasingly difficult for cardholders to maintain credit card payments within that historically high range.
The payment rate is expected to rise, albeit temporarily, sometime in the mid-year as a result of the federally funded economic stimulus payments mailed to more than 130 million households.
Details can be found in Moody’s latest report.
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