Credit card delinquency and charge-off rates continued their upward climb on a sequential and year-over-year basis in January, according to the latest data gleaned by Moody's Investors Service.
In January, charge-off rates reached 5.48%, the highest level since December 2006, when a change in the consumer bankruptcy law caused charge-off rates to temporarily spike, according to information tracked by the Moody's Credit Card Indices. The January level is also slightly higher than the long-term average of 5.42%. Those rates, which are expected to rise throughout 2008, might rise to the upper limits of the rating agency's performance expectations by yearend, according to Moody's.
A noticeable trend is developing around the delinquency rate, which measures card balances more than 30 days past due. Delinquencies rose to 4.51%, up from its 3.91% level one year ago. That is the highest level in three and a half years, and continues a steady month-over-month climb that began seven months ago. It is also the highest that the delinquency rate has been since April 2004.
"With the charge-off and delinquency rate headed upwards, Moody's has a negative outlook for the U.S. credit card sector," according to a statement from the rating agency. Still, the company saw no immediate reason to take rating action on existing credit-card ABS transactions, mainly because fundamental differences in the credit underwriting standards, risk management, issuer credit strength and macroeconomic driver for credit cards have spared that sector the same downturn happening in the subprime MBS sector.
Not all the latest indicators are necessarily bad, at least in terms of yields on credit card revenues. The average yield on credit cards rose in January to 18.54%, up from 18.34% a year earlier, despite several cuts in the Prime Rate over the last several months. Why? Moody's thinks that card issuers might be exercising the discretion that they have to charge cardholders. Further, the presumed increase in late fees collected on the increasing proportion of delinquent borrowers might account for the increased average yield.
Likewise, excess spread - which reflects portfolio revenues after subtracting expenses such as coupon interest, servicing costs and charge-offs - remains robust by historical standards, coming in at 6.94% in January.
Also in January, cardholders paid back an average of 19.06% of their credit-card debts. The increase was somewhat expected, Moody's indicated, saying that it "was likely caused by a cooling off of the real estate market and, by extension, mortgage refinancing activity." Also, the payment rate remained high by historical standards.
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