The average charge-off rate on U.S. consumer credit cards in September fell to an 18-month low after a hiccup in August caused a one-month rate increase, Fitch Ratings reported Nov. 2.

The average default rate on outstanding credit card receivables in September fell to 9.22%, down 114 basis points from 10.36% in August and lower even than July’s average charge-off rate 9.65%. The average charge-off rate hit its most-recent peak in August 2009 at 11.52%, according to Fitch.

Moody’s Investor Services reported a similar trend during the same period (see story). http://www.paymentssource.com/news/card-charge-off-rates-continue-improve-moodys-3003671-1.html

Though charge-off rates have declined substantially in recent months and may continue to improve in the near term, Fitch believes charge-offs will remain “above historical norms” until the unemployment rate shows improvement. Fitch expects the unemployment rate, which hit 9.6% in September, to stabilize at 9.3% in 2011.

Late-stage delinquency rates on card accounts at least 60 days past due have improved faster than charge-off rates, hitting a two-year low of 3.5% in September, down six basis points from 3.56 in August. The 10-year monthly average for 60-day delinquency rates is 3.22%.

Early-stage delinquency rates remained relatively flat in September, improving by one basis point to 4.61% from 4.62% in August.

“Although still high on a historical basis, credit card defaults have been relatively stable, ... while delinquencies have improved considerably,” Michael Dean, Fitch managing director, said in a statement. “To the extent we see some improvement in the employment situation, particularly on the new jobless-claims front, we could foresee further improvements in charge-offs.”

Tighter underwriting and a “substantial cleansing” of issuer portfolios over the past two years have helped to improve the charge-off trends, according to Fitch.

Large issuers that have written off significant chunks of their card portfolios since 2008 include Bank of America Corp., which wrote off 17.3% of its outstanding receivables; JPMorgan Chase & Co., 14.7%; Capital One Financial Corp., 13.9%; and American Express Co., 11.1%, Fitch says.

Improving credit card portfolio health also has enabled issuers to reduce their loan-loss provisions to a large degree, which boosted their profitability in recent quarters. AmEx’s loan-loss provision for the third quarter declined 73.5% year over year, while Chase cut its provisions by 67.1%, Cap One’s provisions fell 59.8%, and BofA’s provisions were down 37.9%, Fitch says.

As card issuers closed troubled accounts, their portfolios have grown smaller. The six largest issuers’ portfolios shrank by an average of 17.5% between the end of 2008 and the end of the third quarter, Fitch says.

But card portfolios soon may begin to grow again, “particularly since credit continues to improve and spend volume has begun to show more consistent growth,” Fitch says.

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