The average consumer credit card default rate for most large issuers declined again in May, likely bringing the charge-off rate close to 7%, suggest preliminary data from Moody’s Investors Service.
All of the top six credit card issuers except JPMorgan Chase & Co. on June 15 reported fewer accounts deemed uncollectible during May, and Chase’s increase was so slight it is insignificant to the broader trend of credit improvement, Jeffrey Hibbs, a Moody’s analyst, told PaymentsSource in an interview.
“The average credit card charge-off rate will fall below 7% for this reporting period if not the next as we continue to see the results of issuers removing weaker borrowers from their portfolios following the recession,” Hibbs said.
Moody’s plans to publish its version of the industry’s average charge-off rate early next week, after adjusting for variations in card-issuer data.
The average charge-off rate for consumer cards in April was 7.16%, down 19 basis points from 7.35% in March.
If present trends continue, charge-off rates will fall to 4% by the end of 2012, well below historic rates of about 6%, Moody’s predicted.
Charge-offs hit a record low of 3.2% after a new bankruptcy law went into effect in fall 2005, driving certain consumers to write off troubled accounts in advance of normal default patterns, according to Moody’s data.
Moody’s declined to speculate whether charge-off rates will dip below those historic levels during the current cycle, but Hibbs said charge-offs will remain low unless the economy takes another nose dive.
“The borrowers in most issuers’ portfolios already withstood a very severe economic crisis, so they are unlikely to go into default now. And issuers remain very tight with their underwriting requirements, so they are not opening up their pools yet to many riskier borrowers,” Hibbs said.
As receivables continue to shrink because of fewer consumers relying on credit card borrowing, charge-off rates will continue to face downward pressure.
“Receivables have shrunk considerably through the economic crisis, and until consumers begin to spend more or the economy changes, we are not likely to see a change in these patterns,” Hibbs said.
