A spike in Citi’s credit card charge-off rate pushed the U.S. average up in April, according to the latest Moody’s Credit Card Indices. The other five big issuers reported lower or flat charge-offs for the month and Citi’s increase will be reversed in the coming months, we are told. The ratings agency still expects that by the year’s end, the national charge-off index will be at around four percent.
The headline delinquency rate, however, continued its free fall, setting yet another record in the process, the third one in as many months, we learn. Moreover, late payment indices improved across all stages of delinquency: early, mid and late, paving the way for lower charge-offs.
The monthly payment rate (MPR), which in March rose to its highest level ever, fell in April, but it is still at the second-highest point ever recorded by Moody’s and much higher than the historical average. Let’s take a closer look at the numbers.
Credit Card Charge-offs Up to 5.21%
Credit card charge-offs rose for the first time since November of last year, by 27 basis points, according to Moody’s. The current level — 5.21 percent — although the highest one since November, is still lower by 1.95 percent than the April 2011 rate, a decline of 27.2 percent.
The charge-off (also called write-off or default) rate is calculated as the ratio of all individual credit card accounts with overdue balances that an issuer no longer expect to be repaid by their cardholders, in relation to the total number of active accounts in the issuer’s portfolio. Charged-off accounts are written off of the bank’s books as losses, usually at 180 days after the last payment on the account has been received.
Credit Card Delinquencies down to 2.59% – an All-Time Low
The late payment rate fell by 0.14 percent in April to 2.59 percent. This is the lowest rate ever measured by Moody’s since the agency began tracking the indicator more than 20 years ago. It is also the fifth month in a row in which the delinquency rate has remained below the three-percent level, which had never been reached before.
Moody’s headline credit card delinquency rate is calculated as the ratio of accounts on which payments are past due by 30 days or more, in relation to the total number of active accounts. The agency also tracks an “early-stage delinquency rate” for payments that are overdue by 30 – 59 days. This rate also fell in April — by six basis points to 0.66 percent — another all-time low.
There is a limit to how low the delinquencies can fall and it is called zero. The early-stage delinquencies are already very close to it and are much lower than they’ve ever been. And yet they keep falling, dragging down the mid- and late-stage delinquencies as they go and, by extension, the charge-off rate. It’s a fascinating thing to watch and one of the biggest indicators for the huge shift in consumer sentiment toward credit card debt.
The increase in the charge-off rate in April will turn out to be a one-off event and I expect it to be fully reversed in May. As the default rate is a trailing indicator for the delinquency one, the long-term trend of the former indicator must follow the one of the latter, with some delay. And as the early-stage delinquencies are still trending downward, I think that Moody’s expectation for the charge-off rate to fall to around four percent by the end of the year is rather conservative.
But my favorite credit card indicator these days is the monthly payment rate, because it is a great guide to the future trajectory of the delinquency and charge-off rates. The MPR is calculated as the ratio of the amount of credit card debt which Americans are repaying at the end of each month, in relation to the total outstanding principal balance. In April, the MPR fell by 0.62 percent from its record-setting March level, to 21.49 percent, which is still good for an all-time second-best. Historically, the MPR has hovered in the mid-teens, which tells you just how much higher credit card debt repayment has climbed on consumers’ financial priority list.