U.S. credit card charge-offs would continue their downward trajectory even if the economy slips into another recession, according to a new report Moody’s Investors Service released Sept. 29.
The average charge-off rate on bankcards has been declining since March 2010 when it peaked at 11.21%, and Moody’s has forecast that it will likely dip below 4% by the end of 2012 if present economic trends continue.
Through August, the average charge-off rate was 6.02%, down 7 basis points from 6.09% in July and down 401 basis points from 10.03% a year ago (
But as the economy struggles to recover, Moody’s economists are considering scenarios in which another recession takes hold.
“Our economists now believe there is about a 40% chance of a double-dip recession,” Moody’s said in its report, alluding to the possibility of another season of negative economic growth occurring.
If the economy falls into another recession, credit card charge-offs would not spike again as they did during the recession that began in late 2008, when many consumers carried heavier-than-average debt, Moody’s says.
In a double-dip recession, the charge-off rate would fall to “about 5% to 5.5%” at the end of 2012, about 100 or 150 basis points higher than the 4% level Moody’s projects if the economy remains stable or improves.
“The borrower mix in credit card trusts has improved as weak borrowers have charged off at record levels in the recent recession. ... (And) even if the economy falls into a double-dip recession, we expect that charge-offs will still improve from the current level, but not much,” Moody’s wrote.
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