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Credit card losses and late payments continued to improve in June for almost all credit card issuers. However, the improvements in credit card write-offs may not be a sign of improving consumer finances, as much as the result of previous write-offs of bad credit card debt over the past eighteen months, combined with tightened lending practices.
June credit card delinquencies, that is, the number of consumers behind on their payments, fell to their lowest levels this year. Credit card delinquencies, or late payments, are typically a harbinger of future credit card defaults, when issuers are forced to write the bad debt off their book. Indeed, after five months of falling credit card delinquencies, several card issuers reported dramatic drops in credit card defaults for June.
Bank of America, long struggling with the highest default rates, saw write-offs decline from a 12.7 percent annualized rate in May to 11.98 percent in June. BofA delinquencies also improved, dropping from May’s 6.39 percent to 6.16 percent in June. A similar steep drop in charge-offs was seen at Discover Financial Services, which saw write-offs drop from 8.82 percent to 8 percent on an annualized basis, a 10 percent decline month over month. Discover credit card delinquencies also improved, from 4.95 percent in May to 4.81 percent in June.
JPMorgan Chase reported similar improvements in its credit card portfolio; Chase wrote off an annualized 8.38 percent of its outstanding credit card debt in June compared to 8.95 percent in May, and reported a drop in credit card delinquencies from 4.22 to 4.13 percent.
Capital One reported a modest drop in its credit card debt write-offs, which fell to a 9.28 percent annualized rate in June compared to 9.48 percent in May, however, the card issuer’s delinquency rate showed little sign of improvement, inching down from 4.8 percent in May to 4.79 percent in June.
More disappointing news was heard from Citigroup, with defaults increasing from 11.16 percent in May to 11.46 in June, even as delinquency rates fell to 5.44 percent in June from 5.59 percent in May, the lowest levels this year.
American Express continued to pare its credit losses at a much faster rate than other credit card issuers, with charge-offs dropping from 6.3 percent in May to 5.7 percent in June, another 10 percent month-to-month improvement. Amex delinquencies dropped as well, from 2.9 percent to 2.7 percent. American Express caters predominantly to high-income individuals, who have been less affected by the economic crisis.
Despite the decline in credit card defaults, neither analysts nor card issuers were breaking out the champagne just yet. With unemployment rates remaining high, the drop in credit card losses is not viewed as a sign of improving consumer finances. Rather, most analysts view the declining defaults as a sign that card issuers have succeeded in writing off much of their bad loans over the past eighteen months, while avoiding new ones by cutting credit limits and tightening lending standards.
Most credit card lenders remain cautious both because of the continuing sluggish economy and in addition, many are also bracing themselves for the losses they expect to incur when the new curbs on late fee charges step into effect in August. JPMorgan Chase, the largest US credit card issuer with 120 million cards in circulation, for example, predicts that it will lose $750 million in profits due to the new restrictions on late fee charges.
