The average U.S. bankcard charge-off rate dropped sharply in June, registering the second-largest monthly decline since the Bankruptcy Reform Act took effect in 2005, according to the latest data from Fitch Ratings Inc.
As the worst of the economic crisis that began in 2008 further recedes, the bankcard charge-off rate continues to improve, falling 96 basis points in June to 6.33% from 7.29% a month earlier, Fitch said.
The latest results bring the bankcard charge-off rate “closer in line” with historical averages, Herman Poon, a Fitch director, told PaymentsSource an Aug. 26 interview.
If present trends continue, charge-off rates likely soon will reach levels considered to be “typical” for the card industry, Poon says.
The historical average bankcard charge-offs rate is 5.99%, according to data Fitch has collected since 1991. Bankcard charge-offs following the most recent recession peaked at about 11% during the first quarter of 2010, Fitch said.
In 2005, a higher-than-average number of consumers filed for bankruptcy protection in advance of the reform law’s Oct. 17 effective date, causing the charge-off rate to drop sharply at the time, analysts note.
Another factor helping to drive down card charge-off rates is a reduction in consumer spending in June, marking the first decline in two years, according to Fitch.
“Consumers are still being cautious, but as long as they are charging less and paying off their existing balances faster, we are likely to continue to see the charge-off rate falling further,” Poon says.
As the economy gradually recovers from the recession, fewer consumers are falling behind on their card accounts, Poon notes.
Delinquencies on credit card accounts at least 60 days past due in June fell 11 basis points, to 2.46% from 2.57% in May. The early-stage delinquency rate, registering the percentage of consumers who through June had missed at least one payment, remained steady at 3.34%.
“Delinquencies as a whole have been declining steadily for 18 straight months, and they declined further during June as consumers continued to keep up better with payments,” Poon says.
Private-label retail credit card charge-offs also showed significant improvement during June, Fitch said. The average charge-off rate on private-label cards that month fell 40 basis points, to 9.45% from 9.85% at the end of May.
Private-label card charge-offs are “much improved over a year ago,” but the charge-off rate continues register higher than bankcards “because the portfolio mix is different,” Poon says.
