Collector - June 2010

By Emily Grace
credit world
Credit Card Trends

Revolving credit is declining, but the volume of charged-off credit card accounts remains high

Delinquency and charge-off rates are sending mixed messages to the credit card industry. The impact of the economic recovery and increased regulations have many uncertain about the future of the industry as a whole.

U.S. Credit Card Debt

More Americans are paying down their credit card debt. According to statistics released by the Federal Reserve Board, revolving credit, which is primarily credit card debt, declined at an annual rate of 13 percent in February 2010. The $858.1 billion in revolving credit reported in February is down $100 billion from the fourth quarter of 2008.

“Consumers seem to be taking some steps to reduce their credit card debt, some of it out of necessity, some voluntarily,” said Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “They are using cash and debit cards more often and charging less on their credit card, possibly due to the APR increases they have seen. But significant actions by the issuers have also contributed to this decrease."

Delinquency Rates

Consumers are also paying their credit card bills on time. In March, most major issuers of credit cards experienced a slight decrease in delinquency rates, with only Citigroup Inc. reporting a slight increase. Economists believe consumer delinquency rates—payments at least 30 days late—are an indicator of future loan losses. They see the lower delinquency as a sign of economic recovery.

The delinquency rates for March

2010 versus February 2010:
• American Express—Fell to 3. 3
percent from 3. 6 percent.

• Bank of America Corp.—Fell to 7.07 percent from 7. 23 percent.

• Capital One Financial Corp.—Fell to 5. 3 percent from 5. 51 percent.

• Citigroup Inc.—Rose to 6.06 percent from 5.94 percent.

• Discover Financial Services—Fell to 5. 39 percent from 5. 5 percent.

• JPMorgan Chase & Co.—Fell to 4. 51 percent from 4.67 percent.

Charge-Off Rates

Although the decrease in delinquencies indicates economic improvement, the volume of charged-off credit card accounts remains elevated. The charge-off rate measures those credit card account balances written off as uncollectible as an annualized percentage of the total outstanding principal balance.

According to the Federal Reserve Board, the charge-off rate for all banks (not seasonally adjusted) was 9. 40 percent in the fourth quarter of 2009. While the rate dropped from the previous quarter’s all-time record rate of 10. 10 percent, it is significantly higher than the fourth quarter 2008 rate of 6. 3 percent.

The charge-off rates for March 2010
versus February 2010:
• American Express—Rose to 7. 5
percent from 7. 4 percent.

• Bank of America Corp.—Dropped to
12. 54 percent from 13. 51 percent.

• Capital One Financial Corp.—Rose to 10.87 percent from 10. 19 percent.

• Citigroup Inc.—Rose to 11. 55 percent from 11. 29 percent.

• Discover—Dropped to 8. 51 percent from 9. 11 percent.

• JPMorgan Chase & Co.—Rose to

9. 51 percent from 9. 21 percent.

“We’re at that inflection point where credit losses have either peaked or started peaking, so they should start to trend down, but the question is how quickly they come down,” said Michael Taiano, an analyst at Sandler O’Neil in a recent Reuters article. “The jury’s still out.”

Financial Performance for the First
Quarter of 2010

So how has the increased charge-off rate affected credit issuers’ bottom lines? Many have reported positive gains in their first quarter earnings for 2010. Bank of America Corp. reported a $3.2 billion net income, compared to the $194 million net loss they experienced in the fourth quarter of 2009.

“With each day that passes, the 2010 story appears to be one of continuing credit recovery, and our results reflect a gradually improving economy,” said Brian T. Moynihan, CEO and president of Bank of America.