US Credit Card Performance Continues on Downward Trend
Credit card debt performance is expected to worsen in the second half of 2008, despite a slight dip in July’s charge-off rate from the prior month, according to Moody’s Investor Services’ mid-year review of the U.S. bank credit card sector.
Moody’s Credit Card Credit Indices track five key metrics of the $450 billion of U.S. bank credit card loans backing securities rated by Moody’s. Most remained negative, with first-half 2008 metrics down sharply compared with the first half of 2007.
For example, the charge-off rate rose at an annualized rate of 33.3 percent through July, compared with the first six months of 2007, and the delinquency rate rose 19.5 percent.
The payment rate index, which reflects cardholders’ ability and willingness to repay their credit card debt, continued to decline to 18.21 in July from 19.92 a year ago.
Moody’s noted that late-stage delinquencies rose more than early-stage delinquencies, meaning credit card borrowers are having a hard time recovering once they begin to fall behind in payments.
Further darkening the outlook for credit card charge-offs, Moody’s said, was the sharp jump in the August unemployment rate to 6.1 percent, the highest in five years, rising bankruptcy filings and proposals to restrict credit card companies from changing the terms of their agreements with consumers.
Several proposals from the Federal Reserve and federal lawmakers aim to restrict card companies’ ability to (among other things) re-price for risk, which, if enacted, could further challenge issuers’ ability to manage yield. The issuers’ ability to re-price is a valuable risk management tool, so should these proposals be put into practice, the implications for the card industry could be significant.
The U.S. credit crisis has made funding more difficult for some credit card issuers, a development that Moody’s said will become increasingly important in the coming months for its analysis and ratings in the sector.
Many banks are responding to poor credit conditions by tightening their credit standards, which Moody’s said could help ease, but not eliminate, future credit card charge-offs.
Details are available in U.S. Credit Card Mid-Year Performance Review.
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