Credit Card Delinquencies are Rising

It appears that the credit quality improvements enjoyed by issuers since 1997 have finally played out. December marked the first time in three years that the delinquency rate on credit cards failed to improve from its year-earlier level. Moody's Investors Service reports that in the $325 billion of credit card receivables it tracks, the delinquency rate (defined as the proportion of total balances in which a monthly payment was 30 or more days past due) increased in December, 2000 to 4.91%, up from 4.84% one year earlier. Warning signals had been flashing for card issuers since last summer as the year-over-year improvement in delinquency rates had steadily declined. Moody's analysts believe it is too soon to tell whether the delinquency rate will stabilize or worsen, but the trend does not bode well for chargeoff rates.

The figure below displays the patterns in both delinquencies and chargeoffs over the past decade. The most striking feature of recent years has been the steady impovement in delinquencies and chargeoffs since 1997. The Moody's index values are not seasonally adjusted so month-to-month fluctuations are likely influenced by seasonal factors. Consequently, to identify trends it is more useful to compare a given month's value with the same month the previous year.

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The Moody's chargeoff index rose sharply in December 2000 to 6.67% from 5.62% one year earlier. Chargeoffs are defined as the amount of bad loans written off as uncollectible as an annualized percentage of total balances. The sharp increase was mostly due to a one-time technical re-classification of loans by one of the major issuers (MBNA) to conform to Federal Financial Institutions Examination Council (FFIEC) guidelines for classifying delinquent loans. Without the one-time adjustment the December chargeoff rate would have been 5.49%, still lower than the previous year. However, like the delinquency rate, the rate of improvement in the chargeoff rate has been shrinking.

Moreover, the principal payment rate declined in December for the fourth time in the past six months. Cardholders repaid 14.34% of their outstanding balances, compared to 15.46% in December, 1999. The highest yearly average payment rates in the ten-year history of the Moody's index occurred in 1999 and 2000, the culmination of 3 years of steady increase. Given the repeated declines since July, 2000, coupled with rising delinquency rates, the upward trend in the payment rate appears to be behind us.

All of these signs, together with the rapid deceleration of U.S. economic activity, suggest that the credit quality cycle has turned. Some creditors have begun tightening their consumer lending standards accordingly. The Federal Reserve's January 2001 Senior Loan Officer Opinion Survey found that a much larger fraction of domestic banks reported tightening standards and terms on non-credit card consumer loans, as compared to the survey conducted in November 2000. A net 35% of banks indicated that demand for all types of consumer loans had weakened somewhat over the previous 3 months. However, residential mortgage loan standards and demand were virtually unchanged.