Moody's: Dichotomy in Card Delinquency Trends May be Due to Tough Collection Environment

Credit card performance in April deteriorated in four of the five metrics tracked by Moody's Credit Card Credit Indices, which monitors more than $445 billion
of U.S. bank credit card loans backing securities rated by Moody's Investors Service.

"There is little doubt that the credit card industry is in the midst of a challenging
period and that collateral performance will get worse before it gets better," Moody's analysts William A. Black and Sarah Huang said in their report, released Monday.

Moody's charge-off rate index climbed to 6.27% in April, the highest level since December 2005, when rates spiked due to the revisions in federal bankruptcy code. This compares with a rate of 4.77% in April 2007.

Moody's expects the charge-off rate "may be poised to surpass the peaks following previous recessions due to fundamental factors such as challenging economic headwinds and technical factors, such as the normalization of bankruptcy filings.

After the last two economic contractions in 1991 and 2001, charge-off rates peaked at just over 7%, the analysts noted.

April's delinquency rate, which measures the proportion of account balances for which a monthly payment is more than 30 days late as a percent of total balances, rose to 4.50% from 3.70% a year ago. This measure last peaked in April 2002 at 5.52%.

"For the past several months, the early-stage delinquency rate ¬– card balances one or two payments past due – has been relatively stable," while the late-stage delinquency rate – balances three or more payments in arrears – has been on the rise, Moody's states.

"This apparent dichotomy between the trends in early- and late-stage delinquencies may be indicative of an ever more challenging collection environment. That is, once cardholders fall behind in their credit card payments, it is increasingly difficult for them to become current on their payments again," the index authors said.

Moody's payment rate index, a measure of cardholders' willingness and ability to repay their credit card debt, fell to 17.49% in April. Until recently, the payment rate had, on average, remained within the historically high range of 18% to 20%. Moody's attributes the decline to competing needs such as food and fuel costs, and the tighter credit underwriting that limits consumers' ability to cash out with mortgage refinancings to pay down card debt.

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