As an increasing number of consumers struggle with credit card debt, many are choosing to walk away from their debt altogether. According to the latest report from Moody’s Investors Service, credit card defaults continued their upward climb in August of 2009 after leveling off slightly in July.
Moody’s August report showed a sharp increase in defaults, or charge-offs, i.e. credit card debt that is more than 60 days old and which card issuers has written off as uncollectable. The default rate climbed to 11.49 percent, almost a full one percent higher than the 10.52 percent reported for July. Compared to 12 months ago, the default rate is up almost 70 percent, from 6.8 percent in August of 2008.
For card issuers this is bad news. Default rates at 11.49 percent means that they are losing 11.49 cents for every dollar of credit card debt on the books. And more defaults are in the pipeline. Early-stage delinquencies, i.e. accounts with payments late by 30 to 60 days, increased to almost 5.8 percent, compared to 4.6 percent a year earlier.
August is seasonally a time when delinquency rates begin to increase, as back-to-school expenses, and later holiday purchases, put greater demands on families’ budgets. However, Moody predicts that the defaults will continue to climb to around 12 to 13 percent by next summer. Credit card defaults tend to be linked to unemployment rates, which currently stand at 9.7 percent nationally and are expected to increase to 10 to 10.5 percent by June next year.
The increasing credit card defaults come in an environment where consumers have become increasingly disenchanted with credit card companies. Cardholders have been hit with interest rate hikes, fee increases, and decreased credit limits, even as many are struggling to make ends meet and pay down their credit card debt.
The trend of increasing credit card default rates is not limited to the U.S. alone. Canadian card holders are defaulting on their credit card debt in record numbers as well. Canadian charge-offs hit a record 4.8 percent in the second quarter of 2009, according to Moody’s. And, while this level is considerably lower than U.S. numbers, it represents an almost 60 percent increase from the 3.07 percent level a year earlier. Canadian default levels are traditionally much lower than those of the U.S. and the U.K.
The increasing default levels are just one more sign that the economic crisis continues unabated. Mortgage delinquencies in the first half of 2009 reached a record 9.24% of mortgages, according to the National Delinquency Report from the Mortgage Bankers Association (MBA). Adding the 4.3% of mortgage loans that have already gone into foreclosure, the combined percentage of loans past due or already in foreclosure reached 13.16% during the second quarter of 2009, the highest ever recorded by the MBA survey.
