U.S. Credit Card Performance: More Deterioration in April

Credit card debt performance continued to deteriorate by most measures in April, but trusts appear well positioned to withstand higher losses, Moody’s says. Still Moody’s sees continuing signs that credit card borrowers are finding it increasingly difficult to become current once they fall behind in payments.

Performance deteriorated in four of the five metrics tracked by Moody’s Credit Card Credit Indices, which tracks more than $445 billion of U.S. bank credit card loans backing securities rated by Moody’s.

There is little doubt that the credit card industry is in the midst of a challenging period and that collateral performance will get worse before it gets better, Moody’s says. “For some trusts, a further weakening of the collateral performance may put downward rating pressure on some outstanding credit card ABS ratings — especially those relating to subordinate classes. Nonetheless, with excess spread at near-historic highs, most trusts appear to be well positioned to withstand a worsening credit environment — even if losses exceed former post-recession peaks.”

The charge-off rate index continued to climb and was 6.27% in April, the highest it has been since December 2005, when charge-off rates spiked due to the change in the personal bankruptcy regulations.

Moody’s believes that the charge-off rate may be poised to surpass the peaks following previous recessions due to fundamental (i.e., challenging economic headwinds) and technical (i.e. normalization of bankruptcy filings) factors. After the last two economic contractions, in 1991 and 2001, charge-off rates peaked at just over 7%.

In April, the delinquency rate index fell month to month for the first time since mid-2007 — albeit by only seven basis points (0.07%). For the past several months, the early-stage delinquency rate (i.e. card balances one or two payments past due) has been relatively stable, while the late-stage delinquency rate (i.e. card balances three or more payments past due) has been on the rise.

This apparent dichotomy between the trends in early- and late-stage delinquencies may be indicative of an ever more challenging collection environment. That is, once cardholders fall behind in their credit card payments, it is increasingly difficult for them to become current on their payments again.
In April, the late-stage delinquency rate remained relatively high, but fell slightly from May. The trend in delinquency rates is often a leading indicator of the trend in future charge-off rates.

Also, the payment rate index, which is a measure of cardholders’ willingness and ability to repay their creditcard debt, fell to 17.49% in April. Until recently, the payment rate had, on average, remained within the historically high range of 18% to 20%. The rate has fallen in recent months as rising prices for necessities like food and fuel make it increasingly difficult for cardholders to maintain credit card payments within that historically high range.

The payment rate is expected to rise, albeit temporarily, sometime in the mid-year as a result of the federally funded economic stimulus payments mailed to more than 130 million households.

Comments

[ponchovilla]

One year from now these numbers may look good.

[richie thediver]

Un fortunately seeksome, not everyone is able to meet all of their family needs without overextending themselves. While most of of reading here have the luxury of disposable income for investing, many others at this time do not.

[in_the_know]

The more I read, the more I see how much is not understood about these associations (Visa, Mastercard). They do not get funded by the individual card holder. The issueing bank holds the debt, Visa and MasterCard just collect the 'toll'. Evertime you swipe your card a member of the association pays the fee.

[greencapitalist]

friends, checkout at matrader.blogspot.com

if you missed ma after smash earnings, after smash guidance, now is a great chance.

and hey don't worry about those who complain on plastic. mastercard story is global and in global world plastics is a new thing and also they have much more discipline to pay money regularly in europe, asia pac, india, brazil, russia, etc.

[SuperStocker]

I seriously believe Visa and Mastercard will continue their upward movement. Even in a recession, people still need to buy stuff and what better way to do that than with credit cards. American Express is caught up into this mortgage crisis, so it may still have some down problems. Long term, V and MA will continue to do well.

I also believe Silver and Platinum will be moving if as inflation increases. here's a good blog to check out: www.superstockblog.com

[BelvedereResearch]

Visa & Mastercard are just payment processing companies, like PayPal or whatever. They provide a service that offers convenience and deserve to make their profits for doing so. The banks (COF, BoA, Providian, AmEx, etc...) that extend the lines of credit are not so clearly adding value to the economy and their profits are far less deserved.

COF for one (I'm short w/ puts) has fallen about 20% in the last month or so, and I believe they have a ways further to fall. Issuing banks have several factors squeezing them right now:
(1) debt already on the books is much less likely to pay off than they thought when they issued. "thought" may be too generous, maybe "hoped" is a better word
(2) overextended consumers, and those who file bankruptcy etc... will (eventually) stop charging as much to their cards as they feel the pinch which bounds their profits. Admittedly, in the short term, they may charge more because they have to, but you can only spend more than you make for so long...
(3) As more consumers/voters get overwhelmed with their credit card situations, there will be more public outcry and vilification of the credit card industry for their shady double cycle billing and high APR fees. Congress will get in on the act and will pass legislation limiting the fees that card companies can charge (it's an election year after all!) and this will SEVERELY squeeze profit margins. Intuitively, I have to believe that a lion's share of card issuers' profits come from penalties and fees that could be (and probably should be) curtailed.

I'm talking my book here since I'm betting against COF, but in my opinion COF will be the CFC (countrywide) of 2008...