Credit Card Defaults Cool Down

The rate of U.S. credit card defaults showed some signs of stabilization in July 2009 after months of steep deterioration. Current improved trends in credit card portfolios of most banks also come as an indication that American consumers may not be in as bad a shape as anticipated, despite job losses and the housing slump.

Credit card loans are charged off after consumers are delinquent on numerous payments and the company determines those loans won’t be repaid.

Citigroup Inc. (C) recorded a decline in its credit card charge-off rate to 10.03% in July from 10.51% in June.

Bank of America Corporation (BAC), the bank with the highest default and delinquency rates among the top credit card issuers, witnessed a decline in its charge-off rate to 13.81% in July from 13.86% in June, 2009 while its delinquencies improved to 7.58% from 7.73% in the prior month.

American Express Company’s (AXP) rate of charge-offs, fell to 9.2% in July from 9.9% in June. The rate of delinquencies slipped to 4.2% from 4.4% in June. Despite the slight improvement, the company’s rate of losses on credit-card loans is still significantly higher than 5.3% it experienced in the second quarter of last year.

JPMorgan Chase & Co. (JPM) rate of losses on its credit card loans eased in July to 7.92% from 8.04% in June.

However, Capital One Financial (COF) was an exception to the trend in July, as both its charge-off rate and delinquencies rose. The company’s charge-off rate grew to 9.83% from 9.73% in June, while its delinquency rate rose to 4.83% from 4.77%. Furthermore, Discover Financial Services (DFS) and Citigroup reported an increase in the number of customers falling behind on payments due for more than 30 days. This could be another sign that household finances have yet to recover from the recession.

Therefore, these mixed results may simply show that some credit card companies were able to manage credit problems more efficiently than others as the economy deteriorated.

The positive credit cards default data does not necessarily mean that the customers are financially better off. The recent slowdown in defaults could be attributable to seasonal effects, as Americans use tax refunds to pay down debt, and predict bad-loan levels will keep rising until the second half of 2009 or early 2010. The slight increase in the monthly credit card data also could be attributed to the fact that consumers are striving to maintain a good relationship with their card companies, their primary cash-equivalent resource in these challenging times.

Any further increases in the unemployment rate could cause a second spike in credit losses in the second half of the year. Most analysts expect write-offs to rise modestly in the third quarter of 2009 and stabilize somewhat but remain elevated in the fourth quarter. The expectation is also based on the trend that consumers typically fall behind on payments in the last half of the year as holiday spending increases and some overspend.

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