How Low Can Credit Card Chargeoffs Go?

A common theme recently among credit card debt collectors has been, “Doing more with less,” in that card shops are simply getting less volume, but expected to continue delivering recovery rates of two years ago.

The drop in volume isn’t difficult to figure out: credit card chargeoff rates at U.S. issuers have plummeted in the past 12 months. But it should be noted that the current charge-off rates are still above historical averages.

So how low can credit card charge-off rates go? Much lower.

Charge-offs occur when accounts default, or when they reach a bank’s delinquency period threshold. So a good way to gauge future charge-offs is by looking at the delinquency rate.

Taking a look at the image above, it’s clear that delinquencies have bottomed out, and charge-offs are following. But there is still more room at the bottom for charge-offs, as delinquencies are a leading indicator of charge-off rates.

The vast discrepancy in chargeoff rates and delinquencies in 2009 and 2010 can be partially explained by the financial crisis of late 2008. The main issue at many banks was balance sheet integrity. Many banks held too many liabilities (defaulted accounts) in relation to assets (paying accounts). So they charged-off an outsized portion of their credit card portfolios.

But this is all over. Going forward, expect to see charge-off rates come more into line with delinquency rates. You can track the actual data in the table below.

How low do you think credit card charge-off rates will go over the next 12 months?

Credit Card Charge Off and Delinquency Rates

(Rates seasonally adjusted and annualized)