Inside the Black Hole

A record-high percentage of Americans kept making their credit card payments on time in October, keeping the aggregate delinquency rate unchanged for the third consecutive month and at the lowest level in more than four years, according to the latest data from Moody’s, a credit ratings agency. The charge-off rate fell by six basis points from its September level and is now about 3.5 percent lower than the rate recorded at the same time a year ago.

The six largest U.S. card issuers reported mixed data for their credit card portfolios in October. Two of them – Bank of America and Citigroup – had lower default rates for the month and the issuers were also split in the delinquency category, with BofA, Discover, Citi and American Express recording decreases.

Credit Card Charge-offs Down 0.06%

The decrease in defaults by 0.06 percent in October, although not nearly as impressive as September’s 0.75 percent decline, was nevertheless noteworthy for continuing a pattern that began immediately following the Lehman collapse in 2008. According to Jeffrey Hibbs, a Moody’s Assistant Vice President:

Earlier in the decade, sharp charge-off improvements in September were typically followed by increases in October, a pattern that has been broken now for the past three years as charge-offs continue their steady descent.

Charge-offs (or defaults) are overdue credit card balances that lenders no longer expect to be repaid and write off (charge off) of their accounting books as losses, usually 180 days after receiving the last payment on the account.

Moody’s expects defaults to continue to decline throughout 2012, with the charge-off rate eventually falling below four percent.

Credit Card Delinquencies Flat at 3.04 Percent

Having previously fallen for 22 months in a row, Moody’s aggregate credit card delinquency rate for October remained unchanged at 3.04 percent for a third consecutive month. That is still about a third below the rate measured a year ago.

Moody’s headline delinquency rate measures the proportion of credit card accounts for which payments are late by at least 30 days. The early-stage delinquency rate – payments overdue by 30 – 59 days – fell by a single basis point in October, to 0.86 percent, which is also a record territory, as Hibbs tells us:

With the early-stage delinquency rate index hovering near its all-time low, the pace of further improvement is likely to be muted. However looking ahead, the calendar is moving into a period that suggests seasonal declines in the early-stage delinquency rate in the coming months.

Isn’t it a bit counterintuitive that the holiday shopping season, when we spend more than at any other time of the year, would produce a more disciplined debt repayment pattern?

Biggest Issuers’ Reports Mixed on Charge-offs, Delinquencies

The six largest U.S. credit card issuers were almost evenly split in their October charge-off and delinquency results. Here is how each of them fared:

Here is how the issuers’ latest measurements compare to the post-Lehman record-highs:

As you see, American Express leads its peers in both absolute numbers, as well as in biggest percentage decreases in both categories.

The Takeaway

The third consecutive month of flat delinquencies gives us the strongest indication yet that the decline in the rate of overdue credit card payments may have come to an end. Charge-offs, on the other hand, are still declining and will continue to do so for several months after the delinquencies have flattened out, which is why Moody’s expects them to fall below 4 percent sometime next year.

Additionally, the latest Federal Reserve data show that credit card debt in the U.S. is at the lowest level in more than seven years. Moreover, whatever it is they do spend on credit cards, Americans are much quicker to pay back than they have historically been. The October monthly payment rate (MPR), which gives us the proportion of outstanding credit card balances consumers are repaying at the end of each month, is 20.91 percent, according to Moody’s. Although lower by a percentage point from the August peak, the October MPR is still very high compared to a historical average in the mid-teens.

As we keep saying, there is every reason to expect that Americans will continue to be cautious with their credit cards for as long as the economy remains in its current fix and unemployment is at stratospheric levels.

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Americans continued making their credit card payments on time at a record-high rate in September, keeping the aggregate delinquency rate unchanged from the previous month and at the lowest level in more than four years, according to data from Moody’s, a credit ratings agency. The default rate fell by three-quarters of one percent from its August level and is now more than 3.5 percent lower than at the same time last year.

Among the six-biggest U.S. card issuers, however, the picture was more mixed. With the exception of Citi, whose September’s delinquency rate was reported marginally lower than August’s, each one of the other six largest U.S. issuers stated higher levels of late payments in their latest regulatory filings. All six, however, reported lower rates of defaults for the month.

Credit Card Charge-offs Down 0.75%

The most impressive piece of data out of Moody’s monthly report is the steep fall in the default rate. The aggregate amount of outstanding credit card balances charged off by U.S. issuers fell by 0.75 percent in September from the previous month, to 5.27 percent, according to the report. Charge-offs (also called defaults) are delinquent credit card balances that issuers no longer expect to be repaid and write off (charge off) of their accounting books as losses, typically 180 days after collecting the latest payment on the account.

The September charge-off rate, Moody’s tells us, is 3.63 percent lower than the level of 8.90 percent measured a year ago. That must have set some kind of a record for a steep decline.

Credit Card Delinquencies Flat at 3.04 Percent

Following 22 consecutive monthly declines, Moody’s average credit card delinquency rate for September remained unchanged from its August level of 3.04 percent. That is still a 35 percent drop from the 4.65 percent level reported a year ago.

The ratio of credit card payments late by 60 days or more – the late-stage delinquency rate – rose by 0.02 percent to 0.65 percent. The early-stage delinquency rate – payments late by 30 – 59 days – also rose marginally in September, by 0.01 percent to 0.87 percent.

Top Issuers Report Lower Charge-offs, Higher Delinquencies

Five of the six biggest U.S. credit card issuers reported higher delinquency rates in September, but all of them reported lower default rates:

• JPMorgan Chase’s delinquency rate fell to 2.53 percent in September from 2.48 percent in August, after falling for 20 straight months. The bank’s charge-off rate fell for a fourth consecutive month, to 4.13 percent for the period from 4.67 percent. Chase’s current charge-off rate is at its lowest point since well before the financial crisis began and is 62 percent lower than the peak of 10.91 percent reached in January of 2010.
• Bank of America reported a delinquency rate of 3.99 percent in September, up slightly from 3.96 percent in August. This uptick follows 11 consecutive monthly declines, which brought and BofA’s delinquency rate to its lowest level in more than five years. The Charlotte, N.C.-based bank’s charge-off rate dropped by 0.80 percent to 5.99 percent, following another substantial decrease – by 0.64 percent – the previous month. While BofA’s default rate is still the highest in the industry, it is now 59 percent below the peak of 14.53 percent, registered in August 2009.
• Citibank was the sole big issuer whose delinquency rate fell in September – to 3.30 percent from 3.35 percent in August, the lowest level in more than four years. Citi reported a much more impressive drop in its charge-off rate, which fell to 5.87 percent from 6.92 percent in August. Citi still has the second-highest charge-off ratio among the top U.S. issuers, however it is now 51 percent below the peak of 12.14 percent, recorded in August 2009.
• Capital One’s delinquency rate rose 0.22 percent to 3.65 percent in September. It was the fourth consecutive monthly increase, following the record-low of 3.32 percent reached in May. The rate is still 2.15 percent below the January 2010 peak of 5.80 percent. The bank’s charge-off rate declined by 0.20 percent to 3.9 percent for the month. Although it is still higher than the four-year low of 3.77 percent measured in July, Capital One’s default rate is now 64 percent lower than the 10.87 percent peak reported in April of 2010.
• Discover reported a delinquency rate of 2.50 percent, up marginally from 2.49 percent in August, which marked the lowest level in more than five years. The September delinquency level is 56 percent below the October 2009 peak of 5.72 percent. The bank’s charge-off rate for September was 3.17 percent, down from 3.60 percent in the previous month, which marked the first time defaults dropped below 4 percent since October 2007. Discover’s current charge-off rate is 65 percent below the peak of 9.11 percent measured in February 2010.
• American Express continued to lead its peers in both the charge-off and delinquency categories. The New York-based bank reported a delinquency rate of 1.50 percent in September, up from 1.40 percent in August, but still 72 percent lower than the record-high of 5.30 percent reported in February 2009. American Express’s charge-off rate fell 0.4 percent to 2.3 percent, which is 78 percent lower than the peak of 10.4 percent recorded in April 2009.

The Takeaway

The fall in delinquencies must eventually come to an end. It is unclear whether that end has come in September, but if not we are certainly very close to reaching it. Charge-offs will continue to fall for several months after the delinquencies flatten out and Moody’s expects the average to drop below 4 percent by the end of 2012.

Credit standards have eased somewhat in recent months, Moody’s tells us, and other reports have shown that both the number and quality of credit card offers are rising rapidly. Yet, Americans are not increasing their borrowing.

Federal Reserve data shows that outstanding revolving credit, comprised mostly of credit card balances, is at a record low. Moreover, whatever they do borrow, Americans are eager to quickly pay back. The current monthly payment rate (MPR), measuring the proportion of outstanding balances cardholders are repaying at the end of each monthly cycle, is 21.29 percent, compared to a historical average in the mid-teens.

There is every reason to expect that this trend of cautious consumer borrowing will continue for as long as the economy remains depressed and unemployment sky-high.

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American consumers continued making their credit card payments on time in August. While the delinquencies kept falling, however, the aggregate U.S. credit card charge-off rate was slightly up.

With the exception of Capital One, whose August delinquency rate was marginally higher than July’s, each one of the other six largest U.S. credit card issuers reported lower or levels of late payments in their latest regulatory filings. The charge-off picture was similar, with four of the issuers reporting lower levels of defaults for the month (the exceptions being Capital One and Citi).

Credit Card Charge-offs Up 0.08 Percent

The aggregate amount of outstanding credit card balances charged off by U.S. issuers increased by 0.08 percent in August from the previous month, to 6.41 percent, according to the latest data from Fitch Ratings, a credit ratings agency. Charge-offs (also known as defaults) are delinquent credit card balances that issuers no longer expect to be repaid and write off (charge off) of their accounts as losses, typically 180 days after receiving the latest payment on the account.

Even as the charge-off rate has risen slightly in August, however, Fitch tells us that it is still 35 percent lower than the level measured a year ago and is now close to the historical average of 6 percent.

Credit Card Delinquencies Fall for 19^th Month in a Row

The default rate is expected to decrease further, as delinquencies keep falling. The ratio of credit card payments late by 60 days or more – the late-stage delinquency rate – fell again in August for the 19^th consecutive month, according to Fitch. The rate was reported at 2.15 percent, down 0.31 percent from the July level and 52 percent below the peak of 4.50 percent reached 18 months ago.

The early-stage delinquency rate – payments late by 30 – 59 days – also fell in August, to 3.02 percent, down 0.32 percent from July.

Top Issuers Report Lower Charge-offs, Delinquencies

Five of the six largest U.S. credit card issuers reported lower delinquency rates in August and four of them also reported an improvement in their default rates:

• JPMorgan Chase’s delinquency rate fell to 2.48 percent in August from 2.52 percent in July, its lowest level in more than four years. The bank’s charge-off rate fell 0.11 percent for the period to 4.67 percent. Chase’s current charge-off rate is its lowest since September 2008 and is significantly below the peak of 10.91 percent reached in January of 2010.
• Bank of America reported a delinquency rate of 3.96 percent in August, down from 4.05 percent in July. It is the 11^th monthly decline and BofA’s lowest delinquency rate in more than five years. The Charlotte, N.C.-based bank’s charge-off rate declined by 0.64 percent to 6.79 percent for the month, more than offsetting the 0.46 percent gain registered in July. While BofA’s default rate is still among the highest in the industry, it is well below the peak of 14.53 percent, reached in August 2009.
• Citibank‘s delinquency rate fell slightly in August to 3.35 percent, down from 3.39 percent in July, the lowest level in four years. Citi charged off 6.92 percent of its cardholders’ credit card balances in August, up 0.28 percent from the July level. Citi now has the highest charge-off ratio among the top U.S. card issuers, although it is way down from the peak of 12.14 percent, measured in August 2009.
• Capital One’s delinquency rate rose 0.06 percent to 3.43 percent in August, which is still 2.37 percent below the January 2010 peak of 5.8 percent. The bank’s charge-off rate also rose, 0.33 percent to 4.1 percent for the month, after reaching in July the lowest level in more than four years at 3.77 percent. Capital One’s highest default rate was measured in April of 2010 – 10.87 percent.
• Discover reported a delinquency rate of 2.49 percent, down from 2.6 percent in July and the lowest level in more than five years. The bank’s charge-off rate for August was 3.6 percent, down from 3.83 percent in the previous month, which marked the first time defaults fell below 4 percent since October 2007. Discover’s charge-off peak of 9.11 percent was reported in February 2010.
• American Express continued to lead its peers in both the default and delinquency categories. The New York-based bank reported a delinquency rate of 1.4 percent in August, down from 1.5 percent in July. American Express’s charge-off rate fell 0.1 percent to 2.7 percent, after rising at the same rate in July. AmEx’s highest charge-off rate – 10.4 percent – was measured in April 2009.

The Takeaway

In addition to making their credit card payments on time at a higher rate than at any time since the Great Recession began, Americans are also paying down larger proportions of their debt. Even though the monthly credit card payment rate decreased by 0.62 percent in August to 21.14 percent, the current level is still about 30 percent higher than the historical average of 16.3 percent.

Additionally, Americans are not increasing their credit card borrowing, even as both the number and quality of credit card offers are increasing significantly. The aggregate amount of outstanding U.S. consumer revolving credit, comprised mostly of credit card balances, fell in July by 5.2 percent, more than offsetting the gains registered in the previous two months, according to data from the Federal Reserve.

So all indications are that Americans are both reluctant to increase credit card spending and eager to pay down existing card debt. There is no reason to expect that this trend will not continue for as long as the economy is depressed and unemployment high.

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Americans continued making their credit card payments on time in July. While the delinquencies kept falling, however, the aggregate U.S. charge-off rate was slightly up.

With the exception of Capital One, whose July delinquency rate was marginally higher than June’s, each of the other six biggest U.S. credit card issuers reported lower or unchanged levels of late payments in their latest regulatory filings. The charge-off picture was mixed, with half of the issuers reporting higher levels of defaults for the month.

Credit Card Charge-offs Up 0.05 Percent

The aggregate amount of outstanding credit card balances charged off by U.S. issuers was up by 0.05 percent in July from the previous month, to 6.09 percent, according to the latest data from Moody’s, a credit ratings agency. Charge-offs (also called defaults) are unpaid credit card balances that issuers no longer expect to be repaid and write off (charge off) of their books as losses, typically 180 days after receiving the latest payment on the account.

Even as the default rate has risen slightly for the month, however, Moody’s still expects it to fall to under 4 percent by the end of next year – more than a third lower than the current level.

Credit Card Delinquencies Fall for 21^th Consecutive Month

The reason Moody’s is so optimistic about the near-term prospects of charge-offs is that the ratio of credit card payments late by 30 days or more – the delinquency rate – fell again in July for the 21^th consecutive month. The rate now stands at 3.09 percent, which is less than half the 6.23 percent rate measured in October 2009, as Moody’s notes.

The early-stage delinquency rate – payments late by 30 – 59 days – also fell in July, to 0.83 percent.

Issuers Report Lower Charge-offs, Delinquencies

Five of the six biggest credit card issuers reported lower or unchanged delinquency rates in July, while only half of them also saw an improvement in their charge-off rates:

• JPMorgan Chase’s delinquency rate fell to 2.52 percent in July from 2.59 percent in June, reaching its lowest level in more than four years. The bank’s charge-off rate fell 0.18 percent for the period to 4.78 percent, after rising by 0.73 percent in June. Chase’s current charge-off level is its lowest since October 2008 – 4.3 percent – and is way down from the peak of 10.91 percent reached in January of 2010.
• Bank of America reported a delinquency rate of 4.05 percent in July, down from 4.16 percent in June. This is BofA’s lowest delinquency rate in more than five years. The Charlotte, N.C.-based bank’s charge-off rate rose by 0.46 percent to 7.43 percent for the period, after falling by 1.06 percent the previous month. BofA’s default rate remains the highest among the six largest U.S. issuers, but is well below the peak of 14.53 percent, recorded in August 2009.
• Citibank‘s delinquency rate fell in July to 3.39 percent, down from 3.56 percent in June, the lowest level in about four years. Even more impressively, the bank’s early-stage delinquency rate fell to 0.92 percent for the period. Citi charged off 6.64 percent of its cardholders’ credit card balances in July, up 0.17 percent from the June level. The July level is still much lower than the 7.95 percent rate measured in February and well below Citi’s highest charge-off ratio of 12.14 percent, reported in August 2009.
• Capital One’s delinquency rate was up 0.04 percent to 3.37 percent in July, which is 2.43 percent below the January 2010 peak of 5.8 percent. The bank’s charge-off rate fell by 0.64 percent to 3.77 percent for the month, the lowest level in more than four years. Capital One’s highest default rate was recorded in April of 2010 – 10.87 percent.
• Discover reported a delinquency rate of 2.6 percent, down from 2.71 percent in June and the lowest level in more than five years. The bank’s charge-off rate for July was 3.83 percent, down from 4.04 percent in June and below four percent for the first time since October 2007. Discover’s charge-off peak was reached in February 2010 – 9.11 percent.
• American Express continued to lead its peers in both the charge-off and delinquency categories. The New York-based company reported no change in its delinquency rate, which stands at 1.5 percent. American Express’s charge-off rate rose 0.1 percent to 2.8 percent. AmEx’s highest charge-off rate – 10.4 percent – was recorded in April 2009.

The Takeaway

The falling delinquency rates point to further declines in the issuer’s charge-off rates in the coming months, even as July’s picture was mixed. You simply cannot get the defaults to rise if more people are paying on time.

What remains to be seen is how much further the delinquency rates will fall. Credit card spending is already on the rebound, with aggregate U.S. consumer credit card balances expanding by 7.9 percent in June, according to the Federal Reserve. Credit card offers are now much more plentiful and higher quality than in a very long time, adding to the incentive to spend more. Yet, the monthly repayment rate remains at near record-high levels, suggesting that Americans are spending within their means. The question is whether this will continue to be the case if spending keeps rising.

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That is what a new TransUnion report tells us. The credit reporting agency’s study makes the latest entry into a debate that started as soon as it became evident that the slashing of consumer credit card debt in the U.S. was not a one-off event in the wake of the scare induced by the Lehman Brothers’ collapse and the ensuing financial meltdown. Rather, Americans had been continually decreasing their outstanding credit card balances until May of this year when a 5.1% increase was reported by the Fed. That figure will almost certainly be revised downwards and we don’t yet know if the tide has now turned, so we shouldn’t jump to conclusions.

But there are plenty of data available now to help us understand how much of the huge drop in consumer indebtedness to credit card companies was caused by higher levels of charge-offs and how much was attributable to consumer payments.

The Charge-off Argument

A study by CardHub.com, a credit card comparison website, released about a year ago, told us that each quarter from early 2009 through early 2010, card issuers had been charging off about $20 billion of outstanding credit card balances, which is about equal to the amount of aggregate decline in consumer credit card debt for the period.

So the CardHub.com researchers seemed to have found an unequivocal answer to the question what caused the fall in consumer credit card debt. But the charge-off rates have now been decreasing continually for more than a year and yet credit card balances kept falling.

The Consumer Payment Argument

Now TransUnion tells us that “consumers made an estimated $72 billion more in payments on their credit cards than purchases between the first quarters of 2009 and 2010.” This is precisely the time period studied by CardHub.

By contrast, back in 2004, the report claims, Americans had made $2.1 billion more in purchases than payments. So we have a $75 billion turnaround in consumer payment patterns from 2004 to 2009.

On an individual level, the debt reduction is no less striking. Between Q1 2009 and Q1 2010, the average American cardholder had reduced his or her outstanding credit card balances from $5,776 to $5,165, according to TransUnion. At the end of Q1 2011, the figure had dropped to $4,679, a 10-year low and 19% below the Q1 2009 level. Moreover, credit card debt was falling for about equal proportions of consumers from groups across the credit risk spectrum:

The Takeaway

The two sets of data seem to be contradicting each other. According to CardHub.com, in 2009 “$81.6 billion of the $93 billion decrease is the direct result of Americans defaulting on their debt. The real decrease in credit card debt is only $11.6 billion.” TransUnion, on the other hand, tells us that consumer credit card repayments did play a major role in the debt deleveraging process.

There is no doubt that both factors played a role in the huge decrease in credit card debt in the post-Lehman world. However, while banks did lose vast amounts in charge-offs in the first two years following the meltdown, both defaults and delinquencies are now at record lows. On the other hand, consumers are now paying down their credit card balances at record-high levels. Even as consumer credit card spending is now accelerating, the credit card monthly repayment rate (MPR) for June was 21.40%, about a quarter above the historical average of 16.20%, according to Fitch Ratings, a credit ratings agency. So for at least a year now, repayment has been the major driver behind falling debt levels.

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