Prime Credit Card Chargoff Rate to Exceed 7% by Year-end
Prime credit card chargeoff rates are up 40% in the 12 months through May, and are projected by Fitch Ratings to exceed 7% by year-end.
Charge-offs represent the value of loans removed from the books and charged against loss reserves. The charge-off rate has risen steadily from around 3% in early 2006 to 6.43% in May.
Fitch expects delinquency and chargeoff rates across prime, subprime and retail credit card sectors to grow as economic pressure on the U.S. consumer continues to mount.
Chargeoff rates in Fitch’s prime credit card index have risen for the ninth straight month, up 40% on a year-over-year basis, with chargeoffs reported in their subprime and retail indices exhibiting similar trends.
Fitch expects chargeoff rates in the prime credit card segment to approach the high end of historically observed performance averages, meeting or exceeding 7% by year end.
Of equal concern are the monthly payment rate (the ability of a borrower to repay their credit card debt) and gross yield (the rates and fees which banks charge borrowers), both of which are also showing signs of deterioration.
ABS transactions financing credit card receivables rely on the combination of these three metrics to generate extra cash flow, or excess spread, to support the deal.
To date, excess spread levels have decreased by 4% in the prime index and 42% in the subprime index on a year-over-year basis. While spread levels remain sufficient enough to maintain current rating levels on senior debt, Fitch reports that this continued compression could begin to put pressure on subordinated debt ratings. “Coming off a two-year period of exceptionally strong performance following the Bankruptcy Reform Act of October 2005, card portfolios still have some cushion before breaching historical performance levels,” said Managing Director Gary Santo, “However, economic pressure, increased borrower debt reload rates, and lack of alternative debt refinancing options are steadily chipping away at that cushion.”
Details are available in Fitch’s Credit Card Movers & Shakers.
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August 15th, 2008 at 10:48 am
[...] will drag on the global economy well into 2009 and possibly beyond. Meanwhile, Fitch notes that prime credit card chargeoff rates are up 40% from a year ago and are likely to hit 7% by year-end, compared to 3% in early [...]