Credit Card Payment Performance Deteriorates

Although not entirely unexpected given the surge in bankruptcy filings, credit card delinquency and loss experience continues to deteriorate. Standard and Poor's Credit Card Quality Indexes indicate that the charge-off rate in a pool of about $337 billion of card receivables (nearly two-thirds of the total U.S. bankcard market) rose to 6.7 percent in April, 2001, 110 basis points higher than one year earlier. April's charge-off rate was the highest since February 1997. Between 35 and 50 percent of charge-offs across issuers currently result from bankruptcy related losses. To the extent that the bankruptcy surge is a temporary reaction to the looming passage of bankruptcy reform legislation, the charge-off rate may soon plateau. However, most analysts believe that rising unemployment and a slowing economy are also contributing to declining payment performance, a situation unlikely to reverse before 2002.

The chart below displays year-over-year changes in both the delinquency and charge-off indices maintained by S&P. Delinquencies in April 2001 were up 70 basis points from one year earlier. The chart clearly shows that the credit-quality story so far in 2001 is just the reverse of the positive experience last year. On a positive note, repayment rates on credit card balances continue in the 15 percent range, substantially higher than the 11-12 percent repayment rates experienced back in the early 1990s. This is consistent with both a higher proportion of "transaction users" (non-revolvers) of credit cards, and the strong debt consolidation motivation behind recent mortgage refinancings.

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