Credit Card ARM Inventory to Remain Strong as Charge Offs Spike

Credit card delinquencies were up in the fourth quarter due to seasonal factors, while charge-offs increased to a new record high in January, according to the latest reports from TransUnion and Moody’s Investors Service.

TransUnion’s quarterly analysis of trends in the credit card industry revealed that the national credit card delinquency rate — the ratio of bankcard borrowers 90 days or more delinquent on one or more of their credit cards — increased to 1.21 percent in the fourth quarter of 2009, up 10 percent over the previous quarter. Year over year, credit card delinquencies remained flat.

Meanwhile, Moody’s reported that credit card charge-offs advanced above 11 percent in January, for the first time ever, to 11.15 percent. The ratings agency predicted that credit card charge-offs will peak at close to 12 percent in the next several months.

Moody’s also reported that the delinquency rate – which it calculates as payments more than 30 days late — dropped to 5.96 percent in January, the first month below 6 percent since September. The amount of a cardholder’s balance paid slid to 17.53 percent in January after increasing in December.

The more that charge-offs increase, the better the picture for delinquencies because the amount charged off is no longer included in the delinquency calculation, noted Ezra Becker, director of consulting and strategy in TransUnion’s financial services business unit. He pointed out that the amount of new credit being awarded is also shrinking as card issuers reign in credit lines.

Higher charge-off rates mean more work for accounts receivable management firms that focus on credit card accounts. ARM firms are already reporting a massive inflow of new work. In insideARM’s latest Credit & Debt Collection Industry Confidence Survey, more than 60 percent of collection agency respondents reported a moderate or significant increase in account placements. Further, nearly 75 percent expect placement increases over the next year.

Becker added that the increase in delinquencies in the fourth quarter was primarily due to holiday shopping. “Consumers decided to use the credit for gifts and take on short-term delinquencies,” he said.

The increase in delinquency between the third and fourth quarters of 2009 is in line with what TransUnion saw at the end of 2008.

Becker expects most of the increase to be paid down in the coming months as people get tax refunds and wage increases. “There are fewer companies doing it, but there are still salary increases and bonuses out there,” he said.

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Becker added that consumers are continuing to keep paying enough on their credit cards so as not to lose them, even as many have lost jobs or have had hours and income cut.

“The drop in credit card balances in the fourth quarter is due in part to the efforts of consumers to pay down their credit cards in response to continued financial uncertainty; they want to keep a credit cushion available for hard times, which unfortunately are faced by many consumers these days,” Becker said.

“Consumers recognize the leeway credit card lenders give them and the level of payments they need to maintain their [credit card] health,” Becker said. “They’re not getting any better at paying their bills, what they are doing is maintaining their level of credit card payments better compared to other loan types.”

“What’s interesting at a more general level is that the national trends in credit card delinquencies over the course of this recession have not been all that closely correlated to the unemployment rate,” Becker said, adding that in the relatively mild recession of 2001 — where unemployment rates were not even close to the levels seen today — credit card delinquencies rose almost 25 percent. Over the course of this recession, credit card 90-day delinquency rates have not moved past the 1.36 percent level in the fourth quarter of 2007, which marked the beginning of the economic downturn.

Credit card delinquency was highest in Nevada (2 percent), followed closely by Florida (1.75 percent) and Arizona (1.62 percent). The lowest credit card delinquency incidence rates were found in Alaska (0.67 percent), North Dakota (0.69 percent) and South Dakota (0.74 percent). Mississippi saw the largest quarter-over-quarter increase of 21.1 percent in credit card delinquency. However, there were some bright spots in the fourth quarter as seven states saw a drop in their credit card delinquency incidence rates.

Average credit card borrower debt, defined as the aggregate balance on all bank-issued credit cards for an individual bankcard borrower, drifted downward nationally by 3.18 percent to $5,434 from the previous quarter’s $5,612, and down 5.15 percent compared to the fourth quarter of 2008 ($5,729). The highest state average credit card debt remains in Alaska at $7,328, followed by Tennessee at $6,823 and Alabama at $6,332. The lowest average credit card debt was found in Iowa ($4,139), followed by North Dakota ($4,318) and West Virginia ($4,448).

Unlike last quarter, no state showed an increase in average credit card debt from the prior quarter. The steepest decreases in average credit card debt over the previous quarter occurred in Nevada (-6.23 percent), Alaska (-4.8 percent) and Rhode Island (-4.4 percent).