New credit card account originations will increase in 2012, but both issuers and cardholders will be cautious, according to a forecast Moody’s Investors Service released Dec. 16.
Credit card account charge-offs will fall to below 4% by the end of 2012 from between 5% and 6% currently, hitting a 20-year low, Moody’s said. And even if the economy worsens and the unemployment rate rises to as high as 11%, charge-off rates likely will remain low, the firm forecasts.
Issuers closing the accounts of thousands of troubled borrowers over the past few years helped drive the improved credit performance, as did cardholders not leaning as heavily on credit cards to finance their spending as they did before the recession, Moody’s said.
Card purchase volume is increasing, but “card balances are flat or declining because cardholders pay more of their balances every month than they used to,” so lenders are unlikely to take on greater risk in the near term, the firm said.
But lenders in 2012 will shift their risk-management strategies a bit by loosening new-account underwriting requirements and by opening up credit lines to borrowers with poorer credit scores, Moody’s said.
The percentage of cardholders with credit scores below 620 was 19% during the second quarter of 2011, up from 14% during the second quarter of 2010, Moody’s said, citing Equifax data. Equifax measures consumer creditworthiness on a scale ranging from 280 at the low end to 850 at the high end.
Even with somewhat looser credit standards, the percentage of borrowers with lower-level credit scores will not rise to the levels seen in 2007, before the economic crisis began, the firm predicts. The share of cardholders with credit scores below 620 was 32% in the second quarter of 2007, Moody’s said.
Despite the anticipated relaxation of lenders’ underwriting standards, the percentage of cardholders with lower-level credit scores in lenders’ portfolios is unlikely to rise sharply next year, Moody’s said. The reason is that lenders are expected to maintain greater discipline in lending than they did before the recession, and the total number of new accounts lenders are approving is also smaller than it was four years ago, the firm noted.
As issuers expand credit availability to a broader spectrum of consumers, “they will price new accounts at higher upfront interest rates” to offset risks, Moody’s said.
New Federal Reserve rules that went into effect in 2010 restrict issuers’ ability to change cardholders’ interest rates on open accounts unless an account is at least 60 days past due.
Total U.S. outstanding credit card receivables, which generally have been flat since the beginning of this year, will show “modest” growth in 2012, Moody’s said. One reason is that lenders continue to pursue prospects with a strong credit history, “who generally spend more but also tend to pay down their balances in full every month, which works against receivable balance growth,” the firm said.
As a result, Moody’s forecasts revolving consumer credit, which stands at about $792 billion, to increase slightly to $792.5 billion in 2012.
