Moody?s: August Charge Offs Rise but Cards Remain Strong

Credit card performance remained strong in August, even as the subprime credit market was in the throes of a crash, according to performance measures tracked by Moody’s Credit Card Indices.

That’s not to say that credit card performance was untouched by the credit crunch. According to Moody’s, comparisons to year-ago rates indicate a weakening across several performance measures. The rating agency said most of this comparative performance deterioration is attributable to technical reasons and is not indicative of a broader weakening in consumer credit performance.

According to Moody’s, the credit card charge off rate rose to 4.61 percent in August, up about 13 percent from a year ago. Yet the August figure is very close to the 2007 year-to-date average of 4.57 percent. That figure is nearly a full percentage point below the long-term average charge off rate of about 5.5 percent, according to Moody’s.

Moody’s said it expects the charge off rate to continue to rise throughout 2007 and 2008, due mainly to an expectation that bankruptcy filings will rise to a level at or near levels achieved prior to the October 2005 change in bankruptcy law. That change led to a spike in filings that month, and a subsequent drop off the next year (because bankruptcy filings were accelerated).

The charge off rate measures those credit card account balances written off as uncollectible as an annualized percent of total loans outstanding. The rise in August marks the eighth consecutive month of year-over-year increase.

Delinquencies, the proportion of payments more than 30 days late, rose to 3.83 percent in August, up from 3.59 percent a year earlier. Subsequently, cardholders paid back 20.07 percent of their credit card debts, about the same as the 20.17 percent performance of a year earlier. Compared to last year, the payment rate has fallen slightly in recent months.

The payment rate historically has followed a long-term secular trend of increase, nearly doubling from the early 1990s to now as credit cards become an increasingly attractive substitute for cash and checks, Moody’s reports.

The indices track monthly performance of over $430 billion of U.S. bank credit card loans backing securities.