While charge-off rates for credit card master trusts remain at recent historical lows, recent numbers indicate that levels have begun rising as the economy slows down.
For the month of September, Capital One Master Trust had the lowest charge off rate at 2.63%, according to a report issued by Credit Suisse First Boston, with the highest excess spread rate among all the trusts CSFB tracked. However, Citibank Credit Card Master Trust saw loss rates jump 26 basis points to 3.60% from last month's 3.34%, but still remains below the industry average.
According to the Fitch Credit Card Charge-Off Index, the September charge-off rate was 4.94%, up one basis point from August's 4.93%, which Fitch is predicting as the new floor for the index.
"I think we're gonna pull back a little bit from the low end of the charge off curve," said Michael Dean, a credit card analyst at Fitch. "I don't think we'll be below 5% for the next period on the charge-off basis." Fitch's index a year ago was 5.21%, and Dean indicated rates increasing to somewhere between 5% and 5.50% for the year ahead.
"Everyone's index is kind of skewed because there was so much growth in the industry in the mid 90s," he said. "I don't foresee it trending into a really troubling level, which is probably in the high 6% to 7% range."
According to data provided by Moody's Investor's Service, rates were at a historic low point in mid-1989, with charge-off rates at 3.66%, and quickly climbed to 6.01% by mid-1991. Charge-offs then held steady in the mid 5% range until 1994, when they began to descend due to robust economic growth, with another climb to 7.10% in mid-1997.
"This slowdown in the economy that everyone keeps talking about, it seems like it's fairly gradual or fairly slow," said an ABS analyst. "So we don't think that it's going to be something where six months from now, you're gonna see rates double. We think that this is gonna be a more drawn out process."
Because consumers are heavily invested in the equity markets, an economic downturn could produce devastating scenarios. "People obviously have a larger share now, in terms of 401k plans and personal investments, exposure to the stock market," the analyst said. "Because of that, I think the rates this time around, if things go sour, they could be worse than it was back then. But I think if anything happens, I don't think it's going to be pronounced for a while still."
Fitch's Dean still thinks the market is healthy, despite the uptick in charge-off rates. "There's a lot of excess spread out there," he said. "That's what investors should look to in terms of portfolio and industry health. The payment rate is still very strong. People are still paying at a historically high rate, which is good for card-backed investors."