Credit Card Processing Blog

Access to credit is still very difficult for Americans and is likely to remain short of demand through the end of 2010, according to a survey of bank risk professionals by the Professional Risk Managers’ International Association (PRMIA), conducted for FICO, the most widely used provider of consumer credit scores to U.S. financial institutions. While the results were somewhat predictable, given the lenders’ extreme reluctance to take any risks in the present economic environment, the numbers are nevertheless telling.

Here are the key findings:

• 73 percent of 235 respondents expect the volume of credit applications to increase or remain steady over the next six months.
• 46 percent of respondents expect approval criteria for credit to get stricter.
• 14 percent expect criteria to be loosened.
• 38 percent of bankers surveyed expect the approval rate for credit applications to decline.
• A quarter of those surveyed expect a higher approval rate.

“Although the outlook isn’t as pessimistic as it was earlier this year, it’s clear we still haven’t reached a point of equilibrium between supply and demand for consumer credit,” stated the obvious Dr. Andrew Jennings, chief research officer at FICO and head of FICO Labs, which works with PRMIA on the quarterly survey. “Banks remain concerned about loss prevention. Government data released in August indicates personal bankruptcies are at their highest levels in five years, and other recent data confirms the ongoing challenges in the employment and housing sectors. This type of economic environment makes it difficult for lenders to open up the flow of credit without taking on significant risk,” he added.

Translation: the availability of credit will not improve until the economy begins to grow again and unemployment falls to a more acceptable level.

A previous FICO survey had already put specific numbers behind the fall in credit availability in the 12 months ending in April 2010. Comparing this period to the previous 12 months, the survey had found that:

• The number of new credit cards opened by U.S. consumers had dropped by 17.7 percent.
• The number of inquiries for new credit fell by only three percent.
• The total amount of credit available on all U.S. consumer credit cards fell by 12.2 percent.

Somewhat surprising is the bankers’ expectations for consumer credit card delinquencies to increase across the board, even though the latest data showed that in July credit card defaults dropped to a 16-month low, while late-stage delinquencies reached a 19-month low. Furthermore, in the second quarter of this year, Americans’ credit card debt decreased for the fifth consecutive quarter, down 4.1 percent to $4,951 from the first quarter’s $5,165, and down by 13.4 percent from the second quarter of 2009, when it stood at $5,719. Here are the risk managers’ delinquency expectations, according to the FICO survey:

• 85 percent expect delinquencies on credit cards to increase or remain the same.
• 15 percent expect delinquencies to drop.

The survey notes that the percentage of bankers who expect credit card delinquencies to rise has decreased from 59 percent in the previous quarter to 42 percent in the present one, but it doesn’t offer an explanation for their pessimism. All data indicate that Americans are consistently paying down outstanding credit card balances and it is not at all apparent why this trend would now reverse itself.

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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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• Free merchant account set-up.
• No fixed monthly fees.
• 24 / 7 customer support.

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.