Serious Delinquency Grew More Slowly in 1Q

Serious credit card delinquencies continued to climb in the first quarter, but there were signs that lenders' tighter credit criteria were having a positive effect.

Veribanc Inc. said 2% of card debt was at least 90 days past due on March 31, well above the 1.70% a year earlier. But the size and rate of increase was less than the rise of 35 basis points between the first quarters of 1995 and 1996.

In its previous quarterly analysis, the Wakefield, Mass., research firm put serious delinquencies at 1.92% on Dec. 31, up from 1.61% at yearend 1995.

While credit card debit grew 8% year-to-year, to $221.9 billion on March 31, serious delinquencies climbed 26%, to $4.45 billion, according to the report by Veribanc research director Warren G. Heller.

By contrast, serious delinquencies jumped 39% in the year through March 1996. And between the fourth quarter of 1996 and the first quarter this year, outstanding card balances fell 7%, which was greater than the seasonal declines in the previous two years.

"Issuers are raising limits for existing and new customers," Mr. Heller said. "The amount that is being issued is still increasing at a very rapid rate, so it is not surprising that delinquencies would follow."

But even as the serious delinquency ratio approaches the last recession's high of 2.03%, he said the problems are "worsening more slowly."

The Veribanc statistic, based on call report data from 10,041 banks, moved in the opposite direction of that which the American Bankers Association found in a membership survey released last week. It showed that the proportion of accounts delinquent at least 30 days improved to 3.51% from the record 3.72% at yearend 1996 and 3.53% in the 1996 first quarter.

"It's hard to say whether delinquencies are worsening a little bit or staying the same, because studies get different results," said Lawrence Chimerine, managing director and chief economist at the Economic Strategy Institute and consulting economist to MasterCard International.

Veribanc said unused card limits-the credit available to cardholders- jumped to $1.36 trillion for the first quarter, a year-to-year jump of 27%.

While banks are fine-tuning credit standards for new cardholders, Mr. Heller said, the policies are not affecting the overall flow of new credit and higher limits.

"This is a very profitable business," Mr. Heller said. "I could easily see executives at a lot of the large companies saying, 'Delinquencies are the cost of business-we can take these high chargeoff rates.'

"This issue has been going on for years now. How long does it take to turn around a really undesirable problem?" he added.

Mr. Chimerine said the delinquency trends do not necessarily mean that more consumers are strapped and overextended.

"Some people are delinquent because they are lazy and pay their bills late," Mr. Chimerine said.

Also, he said, card issuers are increasingly making credit available to riskier and lower-income borrowers. He called this process "healthy" because it brings new consumers into the economic mainstream, but added, "Unfortunately some of these consumers do not manage credit well, and that drives up the delinquency rate."

Another category of debtors are people who use credit cards to start businesses instead of taking out more traditional loans, Mr. Chimerine said.

The high failure rate of these new businesses adds to the pressure.

Veribanc said first-quarter net chargeoffs as a percentage of card debt outstanding rose 27% in a year, to $2.83 billion or 1.27% of total balances.

Meanwhile, serious delinquencies on noncard forms of installment debt, at 0.93%, was down 4 basis from the fourth quarter and 2 basis points from the first of 1996.

Consumers who use credit cards in place of other types of borrowing are helping to push up the card delinquency rate while dampening other types of delinquency, said Mr. Chimerine.

Industry observers are seeing banks slow down mass mailings, tighten credit standards, and in some cases revoke cards. Mr. Chimerine said he expects to see delinquencies stabilize in coming months and start to fall in the next year or two.

"Banks don't want to lose money," he said. "They are reacting and adjusting to delinquencies, and barring a serious economic decline, I think the worst is over-or close to it."

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