The prospect of an increase in credit card interest rates designed to curb consumer spending may cause credit card issuers to adjust their pricing benchmarks over the next few months, according to a recent Fitch IBCA's report Credit Card Movers & Shakers'.
"In the future, to an extent consumers are borderline overburdened," said Michael Dean, senior director of the asset-backed group at Fitch. "The worry is with higher interest rates that some of them will be pushed over or become over-burdened... resulting in higher chargeoffs down the road."
Despite the fact that the credit card sector has seen four short-term rate increases since last summer, credit deterioration ceases to exist. In fact, according to the latest Fitch credit card indexes, consumers continue to manage their debt loads prudently while credit card issuers and card-backed securities investors benefit from strong performance trends across the board.
"Incentives offered by card lenders, and the healthy economy have prompted more cardholders to use their credit cards for convenience purchases rather than as finance tools," said an analyst at Moody's Investor's Service.
Reports also show that consumers are steadily repaying their credit card balances at record rates of 15.12% as compared to January 1999 when the rate was 14.77%.
According to a report issued by Moody's, the chargeoff rate for January 2000 improved for the 23rd consecutive month. The rate in January 1999 was 6.00%, while the rate for January of this year was 5.60%.
Other aspects that may affect credit card securitizations are the continuous production of historically healthy levels of excess spread by credit card portfolios, declining delinquency rates and bankruptcy filings.
Dean speculates that it will take a while for ABS market participants to see the impact of this activity.
"We haven't seen any effects on credit card ABS so far," Dean said, "But to the extent that the interest rate increases continue, you might see that it will result in higher coupon rates on the actual asset-backed securities that are being issued. Card issuers have the ability to re-price those cards. Most of them do reset on a monthly or quarterly basis so now it will play through and offset higher coupons with a higher yield component."
Dean also provided an assessment of the credit card sector and what the Fitch ABS group is anticipating for the year.
"We expect chargeoffs to stay below six percent," Dean noted. "Through year-end it should be a good year. Chargeoffs continue to benefit from falling bankruptcies and good economic positions of the consumers. We also anticipate payments to continue high, which is always good for credit card ABS."
