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Credit card debt performance will worsen through the rest of the year despite a slight dip in July's charge-off rate from the previous month, according to Moody's Investor Services' midyear review of the U.S. bank credit card sector. The outlook for charge-offs, Moody's reports, appears grim because of an increase in the August unemployment rate to 6.1%, the highest in five years; proposals to restrict credit card companies from changing the terms of their agreements with consumers; and rising bankruptcy filings. Moody's Credit Card Indices track five metrics of the $450 billion in U.S. bank credit card loans that back the securities Moody's rates. Most remained negative, with first-half 2008 metrics down sharply compared with the first half of 2007. The charge-off rate, for example, rose at an annualized rate of 33.3% through July compared with the first six months of 2007, and the delinquency rate rose 19.5%. The payment rate index, which reflects cardholders' ability and willingness to repay their credit card debt, continued to decline to 18.21 in July from 19.92 a year ago. Moody's further noted that late-stage delinquencies rose more than early-stage delinquencies, meaning credit card borrowers are having trouble recovering once they begin to fall behind in payments. Funding for some credit card issuers has become more difficult in the wake of the U.S. credit crisis, a development Moody's reports will become increasingly important in the coming months for its analysis and ratings in the sector. Many banks are responding to poor credit conditions by tightening their credit standards, which Moody's expects could help ease, but not eliminate, future credit card charge-offs. The Federal Reserve and lawmakers hope to restrict card companies' ability to change rates and fees in the face of greater risk, which many in the industry view as a valuable risk management tool.
