Credit Card Performance Stabilizes

Credit card losses and delinquencies improved in July, 2002 relative to one year earlier, according to Moody's Investors Services. Moody's Credit Card Indexes track the performance of about $360 billion of securitized credit card receivables.

The chargeoff rate (dollar amount of loans written off as uncollectible, as an annualized percentage of total dollars of loans outstanding) declined to 6.26%, down 21 basis points from a year earlier. The delinquency rate (dollar amount of loan balances 30 days or more past due as a percent of total dollars outstanding) fell to 4.98%, down 8 basis points from one year earlier and the fourth consecutive month of year-over-year declines. Moody's noted that sustained improvement in delinquency rates typically precedes improvement in the chargeoff rate. This pattern was observed in their securitized portfolio series after the 1991 recession and again in late 1997. Further improvements in chargeoffs may be on the way.

Portfolio yield was 18.02% in July 2002, the twelfth consecutive month of year-over-year decreases. Moody's attributes the decline to the lagged adjustment in pricing of variable rate credit cards that are tied to short-term interest rates. The Fed cut target rates 11 times last year for a total reduction of 4.75%, but the average annual percentage rates on credit cards have dropped by less than 1.5% since January 2001. Further erosion in yield is likely. Yet, despite the downward trend in yield, the excess spread on card receivables continued an 18-month-long trend of increases over year-earlier levels. In July 2002 excess spread was 7.08%, up 53 basis points from a year earlier. NOTE: excess spread is the difference between the yield earned on credit card receivables (e.g., finance charge and fees) less the chargeoff rate, servicing fee and cost of funds.

Printer-Friendly Chart