The economy may not be booming, but new data show that personal bankruptcies in 2011 declined for the first time in four years, providing another positive sign for consumer credit card performance.
Bankruptcy filings typically drive 20% to 30% of all credit card charge-offs, Michael Dean, managing director asset-backed securities for Fitch Ratings Inc., tells PaymentsSource.
As a result, when economic conditions cause bankruptcies to spike, card issuers take the hit in higher losses. The lion’s share of charge-offs occur when consumers fail to make payments for six consecutive months and issuers write those accounts off as losses, Dean notes.
Card issuers got a bit of a break from bankruptcy-forced credit card charge-offs last year, as total U.S. bankruptcies for 2011 fell 11.9%, to 1.53 million from 1.35 million in 2010, the first decline since 2006, according to Burlingame, Calif.-based Lundquist Consulting Inc.
Bankruptcies spiked across the U.S. in 2005 leading up to implementation of a new bankruptcy law that caused a rush in filings prior to its effective date. Even a hurricane couldn’t prevent its effects on most consumers (see story).
The recent decline in bankruptcies is the result of “marginally” better economic conditions and the fact that consumers pulled back sharply on spending in the wake of the recession and for the past few years have steadily paid down debt, Dean says.
But the improving trend does not mean consumers are raring to open their wallets and begin spending again, Dean cautions.
Job losses have slowed a bit, and credit card charge-offs are at record-low levels, but there has been no sign of core economic growth, he says.
“There are some conflicting signals out there,” Dean says. “While overall consumer credit health continues to improve, there is not much to base a forecast on. So it is hard to tell what the next year will look like.”
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