Moody’s: Credit Card Defaults To Trend Up in 2010

By Eva Norlyk Smith, Ph.D.

Even as consumers geared up for the Holiday shopping season in November, more were falling behind on credit card payments, according to a report issued by Moody’s Investor’s Services. With unemployment in record territory, charge-offs are expected to get worse before they get better: Analysts at Moody’s predict that credit card default rates will peak at 12 to 13 percent towards the middle of 2010.

Overall credit card default rates rose to 10.56 percent in November, compared to 10.04 in October, edging close to the high of 10.76 in June of this year, according to the report. Credit card default rates are a measure of the uncollectible credit card debt on card issuers’ books. A default rate of 10.56 percent means that card issuers on an annualized basis have to write off 10.56 cents for every dollar of credit card debt they have on their books. The high defaults are offset somewhat by the near-high yields earned on credit cards, which at 21.09 percent continue in record territory. The excess spread, i.e. the profit after charge-offs and other expenses, fell to 7.7 percent in November, according to Moody’s.

The increase in credit card defaults comes after a two-months decline in charge-offs in September and October with write-offs decreasing to 10.04 percent in October. The worst increase in credit card defaults was reported earlier in the month by Citigroup, which saw defaults jumping from 8.79 percent in October to 10.29 percent in November.

Delinquencies also showed increases, however more modest, rising from 6.1 percent in October to 6.2 percent in November. Delinquency rates are a measure of credit card payments more than 30 days late, which have not yet been written off as uncollectible.

Card issuers have been aggressively raising credit card interest rates over the past year, citing the record default rates, increased economic uncertainty, and the new limitations on profits triggered by some of the provisions in the new Credit CARD Act, which are due to step into effect in February of 2010. Consumer advocates, on the other hand, argue that card issuers may have partly precipitated the higher levels of defaults themselves, by increasing interest rates and otherwise tightening terms in ways that make it more difficult for consumers struggling with credit card debt to meet their payment obligations.

Published: December 31, 2009