Consumers continued to pay off their credit cards at historically high rates in the third quarter, with the delinquency rate hitting an 18-year low, according to the American Bankers Association.
Consumer card delinquencies fell to 2.75% during the three-month period, a seasonally adjusted decline of 0.18 percentage points from the previous quarter, and their lowest level since 1994, the banking trade group found.
The falling delinquency rate is part of a broader trend involving consumer debt. For the third quarter, a composite ratio of delinquencies on closed-end consumer loans fell to 2.16%, a drop of 0.08 percentage points.
James Chessen, the ABA's chief economist, attributed the declines to the continuation of three existing trends: consumers rebuilding their balance sheets following the financial crisis, banks aggressively charging off bad loans, and banks' cautious selection of new loans.
"I think banks have been careful as they underwrite new credits not to add significant risks to their portfolios," Chessen said in an interview.
With card delinquency rates remaining depressed for longer than many expected, the question now is how low can they can go.
"I'm a bit surprised that the credit-card delinquencies continue to fall," Chessen said. "They're significantly below the 15-year average, and it's hard to see them falling much below that."
Third-quarter delinquency rates did increase in certain categories, according to the ABA report, which is based on a survey of banks. Home equity loan delinquencies rose from 4.09% to 4.20%, and delinquencies on revolving home equity lines of credit ticked up from 1.91% to 1.93%.
Those increases are in line with some of the trade association's previous quarterly surveys, in which the consumers have proven less apt to pay off consumer debt backed by their homes than they are to pay off their credit cards.
That trend reflects lingering weakness in the U.S. housing market, according to Chessen, but he expressed optimism about that sector's trajectory.
"The housing market is starting to feel like it's on the verge of expanding more quickly," he said.
Paradoxically, economists expect credit card delinquency rates to rise when the broader economy begins to improve, because thawed economic conditions will encourage banks and consumers alike to take on more risk.
Chessen described the broad economic picture as hopeful, though he also noted two potential pitfalls.
The first is a 2% increase in the payroll tax, which went into effect Tuesday when President Obama signed a tax agreement that failed to extend the lower rate. The other is the federal debt ceiling, which will be a key part of the next round of fiscal talks between Democrats and Republicans in Washington. The debt ceiling is expected to be breached around the end of February unless Congress agrees to raise it.