Credit Card Processing Blog

Defaults on U.S. credit cards dropped to a 16-month low in July, according to Fitch Ratings, a credit ratings agency. Consumers continued paying their credit card bills on time, with late payments on cards falling for all major credit card companies that are tracked by Fitch in its monthly Credit Card Index report.

Late-stage credit card delinquencies – payments that are late by 60 days or more – reached a 19-month low, indicating falling rates of defaults in the coming months. Fitch’s 60-day delinquency index reached 3.76 percent in July, down 0.10 percent from June.

Early stage delinquencies also fell, marking their fifth consecutive month of declines. Fitch’s 30-day delinquency index dropped 0.13 percent in July, reaching 5.00 percent. All but one of the issuers tracked by Fitch reported lower delinquency rates in July, with the lone exception being Washington Mutual Master Note Trust.

Fitch’s Prime Credit Card Chargeoff Index also fell, reaching a 16-month low. Charge-offs are delinquent loans that issuers do not expect to be repaid and write off their books as losses. The 9.65 percent rate marked the first time the index fell below the 10-percent mark in 15 months and the second consecutive monthly decline. In July, the charge-off index fell by 0.93 percent from the previous month. All major issuers reported declines in their charge-off rates. Yet, Fitch’s charge-off index still remains 60 percent above the long-term historical average of 5.88 percent.

Fitch’s Monthly payment rate (MPR) indicator also showed an improvement, although a modest one. Measuring the rate at which cardholders are repaying their card balances each month, the MPR rose 0.09 percent in July from the previous month, reaching its highest level in more than two years. Consumers are now paying back 8 percent more of their monthly card balances than they were during the same period last year.

“The trends are encouraging, but card defaults are still elevated historically and are expected to remain so,” commented Michael Dean, the managing director for Fitch. “Unemployment will continue to weigh on consumer credit quality throughout the rest of this year and well into 2011.”

Fitch’s index, which is comprised of data from the largest U.S. financial institutions, including Bank of America, Citibank, Chase, Capital One and Discover, provides yet another indication that U.S. consumers are resolved on reducing their credit card debt burden, even as the recently passed CARD Act has provided a range of protections from abusive and unfair practices, including arbitrary rate increases and excessively high penalty fees. A week ago we learned from a study by TransUnion that Americans reduced their outstanding credit card balances to $4,951 in the second quarter, a decline of 4.1 percent from the first three months of the year, and down by 13.4 percent from the second quarter of 2009, when the outstanding credit card debt stood at $5,719.

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It seems like U.S. and U.K. credit card companies are going through different stages of the financial crisis. For U.S. issuers, both credit card charge-offs and delinquencies have been falling steadily this year and the industry appears to have left the worst behind it. In the U.K., however, the direction is reversed, as banks have reported record-high levels of write-offs in the second quarter of 2010, as reported by the BBC, quoting data released by the Bank of England.

The latest monthly data released by U.S. issuers showed default and delinquency levels at the biggest U.S. credit card companies were falling across the board in July:

• Capital One reported its charge-offs – overdue loans that lenders do not expect to be repaid – fell to 8.13 percent in July from 9.28 percent in June. Its delinquency rate fell to 4.66 percent from 4.79 percent.
• Charge-offs at J.P. Morgan Chase fell to 7.95 percent from 8.38 percent during the same period and delinquencies dropped to 4.06 percent from 4.13 percent.
• Discover’s charge-offs in July stood at 7.28 percent, down from 8 percent in June and its delinquency rate dipped to 4.72 percent from 4.81 percent.
• At 11.39 percent, Bank of America’s charge-off rate was the highest among its peers in July, but it was lower than the bank’s June rate of 11.98 percent. BofA’s delinquencies also fell – to 5.92 percent last month, down from 6.16 percent in June.
• Citigroup reported the most substantial drop in charged-off credit card loans among the biggest issuers. Its rate fell to 9.10 percent in July from 11.98 percent the previous month.
• American Express led the pack in lowest delinquencies, reporting a rate of 2.6 percent, down from 2.7 in June. AmEx’s charge-offs fell to 5.5 percent from 5.7 percent.

Not a single big U.S. issuer reported a rise in either the delinquency or the charge-off rate in July.

Things could not have been more different in the U.K., where the total value of charge-offs jumped more than 50 percent in the second quarter, reaching £2.1 billion ($3.2 billion), up from £1.3 billion ($1.98 billion) in the first three months of the year, according to the BBC report.

U.K. issuers wrote off a record £4.1 billion ($6.25 billion) in 2009 and are well on their way to easily set a new record this year, having already written off £3.4 billion ($5.18 billion) in the first half. Moreover, according to the London-based Times newspaper, British households have the biggest debt burden in the Group of Seven advanced countries, at 180 percent of personal incomes. There are indications, however, that Britons may have reached the bottom and that the worst may be behind them. Debt charities, offering financial advice, report that fewer people are calling for help, according to the BBC. The Money Advice Trust, one such organization that runs the National Debtline, reports that less than 60 percent of its callers were facing credit card debt problems, down from between 66 percent and 70 percent in recent years.

As is the case in the U.S., U.K. debt repayment is on the rise, according to the unbiased.co.uk, a firm providing financial advice to consumers. Britons have repaid £1 billion more than what they borrowed during the second quarter of 2010, the website reported. The latest U.S. Federal Reserve data showed that Americans’ outstanding balances on consumer credit cards have fallen by $144.9 billion, or 14.85 percent, from September 2008 to August 2010.

The common thread in all these reports from both sides of the pond is that both U.K. and U.S. consumers are clearly concerned with the levels of their indebtedness and are taking actions to reduce it, even as unemployment is at record highs in both countries. It will be interesting to see whether the trend will hold when the economy starts to recover and unemployment goes down, or whether consumers will promptly rediscover their buy-now-pay-for-it-tomorrow mood.

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The latest figures released by Fitch Ratings, a credit ratings agency, show that credit card charge-offs surged 1.12% in January to reach 11.37%, the highest level since a record 11.52% in September of last year. Charged-off are credit card loans that issuers don’t believe will be collected and have written off their books as losses. Typically, an account is charged off 180 day after the last payment was received. The same report shows that in January payments that were 60 or more days late were at 4.50%, while those 30 days late stood at 5.72%. These are extremely high levels, but how exactly are consumers affected by delinquent and charged off accounts?

Both delinquent and charged-off accounts are listed as derogatory items on your credit report and affect your credit score. Delinquent payments will reduce your score, but will not have a lasting effect if you resume making payments on time and convince creditors that the odd late payment was an aberration. That is not to say that you shouldn’t be all that concerned with making payments on time. On the contrary, you should, because consistency and honoring the contract terms will help you get the highest possible credit score and lowest interest when you need a loan.

Charged-off accounts present a much bigger challenge and leave a much more lasting effect on your credit history. A single charged-off account can be enough to prevent you from obtaining any form of credit and can hurt your employment prospects. It remains on your credit report for at least seven years and destroys your credit score. Moreover, you are still responsible for the debt after it has been charged off and the lender or a collection agency can still attempt to recover it. The credit reporting agencies report charged off accounts as “negative accounts,” often listing them under “collection accounts.”

The best way to deal with charge-offs is to settle them with your creditor at the earliest opportunity. Remember that the creditor has already written off your account as a loss, so they will be willing to negotiate and accept a settlement for less than the full amount, as little as 50% or less in many cases. Now that you have negotiated a settlement, how does that reflect on your credit history?

Once you settle your debt, the negative information will not be automatically deleted from your credit report. What will change is that your account will be reported as “paid in full” (even if you had settled for less than the full amount), which immediately improves your credit worthiness in the eyes of your prospective lenders.

The best course of action that you should follow, once you settle a charged-off account, would be to:

1. Obtain a letter from your creditor stating that you have paid the account in full and they are required by law to issue such a letter.
2. Send a copy of this letter to each of the national credit bureaus: Experian, Equifax and TransUnion. Under the Fair Credit Reporting Act (FCRA), the bureaus are required to update your report within 30 days.
3. If the information is still not updated after 30 days, the FCRA requires that the account is deleted from your history, which is the best possible outcome for you.

According to FICO, the maker of the most popular credit score, their scores are comprised of the following components:

• Payment history accounts to 35% of the score.
• Amounts owed – 30%.
• Length of credit history – 15%.
• New credit – 10%.
• Types of credit used – 10%.

With that in mind, the following tips will help you improve and maintain your credit score:

• Always make your payments on time, at least the minimum.
• Keep your credit card account balances as low as possible or, better yet, pay them off each month.
• Add new and different types of credit, such as an installment loan, which shows creditors that you can handle regular monthly payments.