Credit Card Delinquencies Drop As Charge-Offs Continue to Rise

U.S. consumer attitudes toward the economy have continued their trend of pessimism and deterioration throughout the year, with no immediate sign of reversal.  Aside from the continued slide of the housing market, other factors including job security – with the current unemployment rate standing at 5.5 percent – have left many households feeling vulnerable when assessing their financial situations.

With good reason, the issue of the rising cost of food and fuel has continued to make headlines.  And now with gasoline prices above $4.00 a gallon nationally, many consumers are tightening budgets as a response.  

How likely consumers are to dramatically reduce discretionary spending is still up in the air, but from the recently released consumer credit report by the Federal Reserve – known as the G.19 – it would appear that a possible slowdown may indeed be underway.  In the Fed’s report detailing credit expansion in April, credit card debt grew at a mere 0.4 percent, down from the 7.4 percent annual growth rate seen in March and the 6.8 percent annual growth rate seen in the first quarter of 2008.

Though slowed in this recent Fed report, it is highly unlikely that credit card spending will continue to see any significant or sustained slowdown. This is due, in part, to both a continued shift in consumer payment preference towards credit cards as well as the continued rise in the cost of necessities such as fuel, which has risen 29 percent over the past year.  

As a result, though discretionary spending will probably see moderate declines, consumer spending on household expenses is likely continue to rise.  

In total, credit card debt in the U.S. stood at $956.9 billion at the end of April.  This is an important figure to keep in mind when discussing outstanding credit card debt and debt quality.  A good barometer of the overall market is the U.S. Credit Card Quality Index (CCQI) – an index tracked by Standards and Poor’s that monitors the performance of receivables held in master trusts of bank card and credit card backed securities – which in April had aggregate outstanding receivables of $430.8 billion held in 22 master trusts.

In April the charge-off rate for the CCQI rose to 5.9 percent from the March rate of 5.7 percent.  This was an increase of more than 34 percent from the 4.4 percent charge-off rate reported in April of 2007 and demonstrates the challenges being faced by creditors to effectively collect on outstanding credit card debt.

Over the past year delinquencies, like charge-offs, have trended upward. But in the most recent report the delinquency rate among credit card trusts in the CCQI actually decreased from 4.5 percent in March to 4.4 percent in April.