The average U.S. consumer credit card charge-off rate fell again in April, underscoring a noteworthy decoupling of the unemployment rate and the number of credit card accounts lenders deem uncollectible, Moody’s Investors Service said in a May 23 report.
The average charge-off rate on consumer credit cards in April fell to 7.16%, down 19 basis points from 7.35% in March, according to Moody’s, which last week predicted the rate would decline for April. The data underscore the effects of card issuers continuing to clear out weaker borrowers’ accounts while adding fewer new accounts to their portfolios, the firm said.
The average delinquency rate on accounts at least 60 days past due in April also declined by 26 basis points, to 3.53% from 3.79% in March.
Moody’s also noted an interesting phenomenon in which the charge-off rate is moving in an unusual direction compared with the U.S. unemployment rate. Though the U.S. unemployment rates historically correlate closely with credit card charge-off rates, this no longer is the case because credit card lending has retracted following the recession, the firm noted.
The unemployment rate is likely to remain above 8% through next year, Moody’s said, but the firm predicts the average U.S. credit card charge-off rate likely will fall below 7% within the next two months. If present trends continue, the charge-off rate will fall below 4% by the end of 2012, hitting a 20-year low.
“Consequently, cardholders who remain (in issuers’ portfolios) are generally of higher credit quality, resulting in demonstratively better performance statistics in the months and years to come,” Moody’s said.
But unemployment eventually will drive charge-offs again as new-account originations increase over time and card portfolios reflect the quality of the typical borrower, Moody’s said.
“The silver lining is that, by the time credit card charge-offs start tracking to unemployment again, unemployment will have recovered from current levels and will be closer to a long-run 5% to 6% rate,” Moody’s said.
Separately, TransUnion LLC on May 23 said early-stage consumer credit card delinquencies during the first quarter this year reached a level not seen in 15 years, dropping to 0.74% of receivables as consumers relied less on credit cards and issuers continued to enforce relatively conservative lending practices.
Average individual credit card debt during the first quarter was $4,679, down 5.8% from $4,965. This is the lowest average debt level seen since the third quarter of 2000, when average debt was $4,695 and 19% lower than the peak reached during the recession of $5,776 during the first quarter of 2009, TransUnion said.
