Credit card charge-offs, delinquencies break records again

Rising unemployment continued to punish credit cardholders last month, according to a new report from Moody's, as both charge-offs and delinquencies reached record highs.

Charge-offs, delinquencies keep breaking records

Moody's credit card index showed that charge-offs -- the amount of credit card debt deemed not collectible by banks -- climbed to 9.30 percent in March, its seventh consecutive monthly increase. For the first quarter, the average charge-off rate was 8.62 percent, up 50 percent from the same period last year. Meanwhile, March's unemployment rate hit 8.5 percent, the highest level since 1983. A weak job market means trouble for consumers who must decide where to direct their thinning incomes, and for an increasing number of cardholders, paying their monthly charges isn't a first priority. 

"Aside from the fourth quarter of 2005, when changes to bankruptcy legislation induced a sharp rise in charge-offs, the pace of increase in the first quarter of 2009 represents the greatest quarterly increase in the charge-off rate index ever posted," Moody's said in a press release.

Delinquencies also rising
Meanwhile, a greater number of cardholders also failed to make on-time payments last month. Moody's reported that its delinquency rate, which measures monthly card payments that are 30 days late, rose to a record high 6.40 percent. That advance broke with traditional seasonal trends that generally show lower delinquency rates in early spring, due in part to tax refunds. "In fact, this year was the largest increase ever recorded from February to March, and only the second year where delinquency rates did not experience a February-to-March decline (2008 was the other year)," Moody's said. 

Analysts warn that escalating losses for card issuers could spell further trouble for borrowers. "Look at the escalation in credit card default rates triggered by rising unemployment and falling consumer wealth!" Tony Plath, professor of finance at the University of North Carolina at Charlotte, said via e-mail. "This has all sorts of implications for the cost and availability of consumer credit in coming months ... all of them bad." Plath said that a changing regulatory environment means a major tightening in the availability of credit to all but those cardholders with the highest credit scores.

In an environment where banks are being encouraged to lend, that is less than ideal. "This is precisely opposite the result the government seeks to obtain, but it's exactly what's likely to happen as an increasingly burdensome regulatory environment and rising credit losses conspire to fundamentally alter the risk-return characteristics of this business," Plath said.

More data confirm downward trends
Moody's wasn't the only group reporting a recent surge in charge-offs and delinquencies. On Monday, Fitch Ratings said its index showed charge-offs jumped to a record 8.41 percent in February, surpassing an earlier record of 7.52 percent in November 2005. Additionally, Fitch reported that credit card delinquencies hit 4.33 percent in February, the third consecutive record high.

The trend of escalating default rates is unlikely to change anytime soon, as the troubled labor market continues to make it difficult for cardholders to pay their bills. Looking forward, Moody's expects charge-offs to peak at about 12 percent in the second quarter of 2010, following a projected peak in unemployment of about 10 percent during the first half of next year.

See related: Credit card charge-offs reach 20-year high, House committee OKs consumer credit card protections, Consumer credit card use suffers biggest drop in 31 years, Survey: 34 million adults pay credit card bills late

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Updated: 12-18-2018