Credit Card Chargeoffs and Delinquencies Contracting Over Summer

Credit card delinquencies and chargeoffs are beginning to ease, which analysts say is a result of tighter credit standards by card issuers and consumers cutting back on card usage for discretionary purchases.

Late last week, rating agency Moody’s said that the charge-off rate on U.S. cards in July was 10.52 percent, down from a record-high of 10.76 percent in June. The overall delinquency rate fell to 5.73 percent in July — the lowest level all year — from 5.81 percent in June.

TransUnion confirmed the trend Tuesday. According to the Chicago-based credit reporting agency, the national credit card delinquency rate fell to 1.17 percent in the second quarter of 2009, down 11.36 percent over the previous quarter. Year over year, credit card delinquencies increased 12.5 percent from 1.04 percent in the second quarter of 2008.

The Moody’s report considers delinquencies as accounts more than 30 days late, while TransUnion uses 90+ days late as the standard for delinquencies.

Average credit card borrower debt (defined as the aggregate balance on all bank-issued credit cards for an individual bankcard borrower) drifted downward nationally 0.98 percent to $5,719 from the previous quarter’s $5,776, but was up 1.74 percent compared to the second quarter of 2008, according to TransUnion.

“The credit card issuers are closing inactive accounts and reducing lines of credit,” said Ken Alverson, managing director, Novantas, a New York-based financial services management consultancy. “They’ve also been a lot more selective about growth. They’re using FICO scores and other data to send offers to only the most creditworthy and profitable customers.”

Alverson said that the credit card issuers are also using analytics to do a better job of balancing revolvers – who bring in interest, late charge and other revenue, but also are higher risk – with high spenders who pay off most or all of their balance every month. The latter group provides more to the issuers in interchange fee profit while being less risky, but don’t provide as much in interest and related revenues.

While many ARM companies are working excess volume this summer, this data suggests that supply of  paper available for collection can contract at some point in the future, according to Paul Legrady, director at advisory firm Kaulkin Ginsberg.

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“Today, there is plenty of inventory, without question, for those collecting or purchasing debt in the card sector,” said Legrady. “If these trends continue, they could have a big impact on the industry as a whole.  In the long term, reduced delinquencies can lead to reduced charge-offs as less credit is extended.  At some point in the future, these trends could impact ARM companies as the economy emerges from recession.”

Ezra Becker, director of consulting and strategy, financial services group, TransUnion, added that the second quarter also has some seasonal factors that can prop up the financial performance of card issuers.

“Consumers have received their tax refunds and the holiday gifts are paid for, so it’s natural for the delinquencies and chargeoffs to drop,” Becker explained. “So it could be a short-term phenomenon; it’s too early to tell.”

“Consumers have also realized that credit cards are their primary purchasing tool,” Becker added. “It’s a means of reconciling any differences from paycheck to paycheck and when they’re between jobs.”

Therefore, credit cardholders are being more careful not to lose their credit cards, even if that means falling behind on mortgages and auto loans, a divergence from historical trends, according to Becker. “It’s too early to tell if this is a short-term phenomenon.”

But he doesn’t expect poor credit quality to be a short-term phenomenon. Despite the improvement in the second quarter figures, the high unemployment picture will probably mean continuing poor credit quality.

“Credit tends to lag the economy even more than unemployment,” Becker said. “Credit quality will likely continue to deteriorate until peaking around the first quarter of 2010.”

Though there is a light at the end of the tunnel, it’s still some distance away, Becker added.