On the heels of a dramatic increase in credit card writeoffs, a veteran analyst is sounding a warning about cardholders' growing tendency not to pay down their balances.
"This is an absolute risk for the industry," said Edward Bankole, Moody's Investor Service's senior credit officer for card portfolios. "If there is a change in consumers' willingness to pay, losses will be much harder to predict."
The hangover of high balances on cards received through aggressive promotions a couple of years ago will continue to merge with consumers' increased willingness to walk away from their debts through bankruptcy, Mr. Bankole said. "Weak consumer credit trends highlight the need for caution."
Bankers on the front lines agree that a change in customer attitudes about debt makes it harder to do business.
"You can't gauge it in your screening or scoring processes," said Patrick Weller, senior vice president and head of revolving credit at Comerica Inc.
They spoke Wednesday just after Moody's reported that monthly writeoffs of securitized credit card receivables had hit 7.10% in April, higher than anything recorded during the last recession and up 150 basis points from last spring.
And Fitch Investors Service reported a 6.93% card chargeoff rate in April, also a record, with the largest increase at Chase Manhattan Corp., to 8.51% from 7.64%, for a portfolio containing both Chase and Chemical Bank Corp. card receivables. The most improvement came at AT&T Universal, to 6.18% from 7.18%, according to Fitch.
The data issued by Moody's and Fitch vary because the agencies track different pools of credit card receivables. Moody's based its latest assessment on $193 billion of balances, while Fitch considered $146 billion.
The American Bankers Association will release its quarterly report on credit card delinquencies Tuesday.
Chargeoffs are the last and most painful step of the credit process, when lenders are forced to give up the idea of repayment. It is usually taken after payments become 180 days or more past due.
Card issuers have relied on limited credit assessments and property values to gauge repayment prospects. Now, Mr. Bankole said, issuers may want to go further into the character of the credit prospect to determine how they have handled debt in the past and, if possible, what their current payment history is on other borrowings.
Higher interest rates on card balances and tougher underwriting standards are also measures to offset losses from steeper chargeoffs, Mr. Bankole said during a seminar sponsored by PSA Bond Market Trade Association.
Lenders agree that it has gotten tougher to gauge consumers' willingness to remain current on their debt.
"Over the last 24 months, we have seen a change," said James Rasmussen, chairman of SunTrust BankCard, Orlando. "Based on industry figures, we know this is happening all over."
SunTrust is shielded somewhat from lax payments because its customers have a number of relationships with the bank and are less inclined to let card debt slide too much, Mr. Rasmussen said.
Comerica has stepped up its collection efforts through outsourcing and systems that more quickly bring potentially troubling accounts to the bank's attention, Mr. Weller said.
