Editorial Policy

Fewer consumers fall behind on credit card payments

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By Eva Norlyk Smith, Ph.D.
February 1, 2011

Fewer consumers fell behind on credit card payments as December credit card write-offs fell across the board for major card issuers — an indication that defaults may continue to improve in the coming months.

All six major credit card issuers — American Express, Bank of America, Chase, Discover, Capital One and Citibank — reported lower charge-off rates. Credit card charge-off rates, or defaults, are credit card accounts deemed uncollectible due to consumer’s failure to pay; they are typically accounts with payments more than 180 days late. Delinquency rates, a measure of the number of credit card accounts at least 30 days behind on payments, also closed out the year at yearly lows. With delinquencies a reliable indicator of future defaults, charge-off rates are projected to continue to fall in 2011.

Citibank, along with Bank of America, has shouldered the highest credit card defaults in the industry and posted the biggest decline in credit card defaults among all major issuers. Citi credit card write-offs dropped to 8.34 percent in December from 9.4 percent in November, well below the high of 11.55 percent reported in March 2010.

Bank of America saw improvements as well, albeit more modest. Bank of America reported December write-offs at 9.31 percent, down from 9.92 percent in November. Delinquency rates dropped modestly in December as well, to 5.24 percent from 5.47 percent in November.

Capital One charge-offs inched down to 7.01 percent in December from 7.56 percent in November, the lowest level for the issuer in more than two years and a considerable improvement from the peak of 10.87 percent reported in March 2010.

December write-offs for Discover Card dropped to an annualized rate of 5.94 percent from 6.72 percent in November; again the lowest charge-offs for the year. The number of consumers more than 30 days late on their Discover Card payments also declined, to 3.91 percent in December compared to a delinquency rate of 4.15 percent in November.

JP Morgan Chase saw credit card charge-offs decline to 7.08 percent in the fourth quarter of 2010 from 8.06 percent in the third quarter, with delinquency rates similarly dropping from 4.13 percent to 3.66 percent

American Express, long boasting the lowest defaults of all card issuers, continued its winning streak. AmEx write-offs fell to an annualized rate of 4.4 percent in the fourth quarter compared to 5.2 percent in the third quarter of 2010. Delinquency rates for the fourth quarter inched down to 2.1 percent from 2.5 percent.

While both default and delinquency rates are declining, the numbers are still high compared to historical levels, and have not yet reached pre-recession levels. Despite improvements, analysts are concerned that the high unemployment rate, which continues to hover around 10 percent, could push default rates back up again. Unemployed consumers often are forced to turn to credit cards to make ends meet, but at the same time, are also more likely to have trouble making their monthly credit card payments.

Additionally, one reason for the decrease in charge-offs has been lenders’ pullback in lending, particularly their hesitancy to lend to subprime borrowers, which gave an artificial picture of the borrowing public and kept credit cards out of the hands of a large sector of the American public. With lenders increasingly resuming credit card solicitations at a faster pace, including for the subprime market, credit card delinquencies could begin inching upwards again.