With the tightening of underwriting standards and strong economic indicators, the credit sector is showing a clean bill of health, experts say.
"We've seen improvement in the performance of credit card portfolios, on a year-over-year basis, with respect to charge-off rates and delinquency rates and we've also seen an increase in principal payments," said Latonia Dukes, vice president and senior analyst at Moody's Investors Service.
According to the February aggregate credit card indexes from Moody's, charge-offs rates went down to 5.67 in 2000 from 6.05 in 1999, a difference of 6.32%. Likewise delinquency rates were at 5.19 in 1999 going down to 4.83 in 2000. The principal pre-payment rate went up to 14.76 this year from 14.32 last year.
Dukes attributed the improvement in overall performance to a healthy economic environment and strong capital markets that enable credit card holders to meet their financial debt obligations and pay-off a larger proportion of their balances.
Card Over Cold Cash and Principal Payment Rates
The nature of credit card use is also changing, positively affecting principal payment rates.
Dukes said that more people are using credit cards in lieu of cash for convenience-sake. Furthermore, more credit card lenders are offering certain perks, like frequent flier miles, which create incentives for credit card users to pay off a larger proportion of their balances.
Michael Dean, senior director of the asset-backed group at Fitch IBCA said the prevalence of rewards-type cards and transactions being done over the Internet "are replacing a portion of cash transactions."
From an investor's standpoint, the rise in principal payment rate over the past two years is a positive trend in an amortization scenario.
"High principal payment rate is a good thing for ABS investors because if you look at an early amortization scenario, investors could theoretically be paid quicker," Dukes said.
Dean added the rising principal payment rate would be good for investors in an amortization scenario because it lessens their exposure to deteriorating portfolio credit quality. Issuers, on the other hand, would prefer longer principal payments because of the finance charges that they could reap as a result.
Tighter Underwriting Standards
Aside from the strong economy and the change in the nature of credit card usage, the tightening of underwriting standards is also a factor that causes the improved performance of the sector.
"The issuers have definitely tightened their underwriting standards since the middle part of the 1990s when we had a rapid run up in charge-offs," said Dean. He added that a lot of the run-up was driven by personal bankruptcy filings.
Dukes said that over the last few years card issuers have spent time and energy developing risk-management tools. With these, "if we have an economic downturn the good news is issuers are probably in a better position to manage the risk on their portfolios," she said.
From a Rating Agency's Standpoint
Though the credit card sector is currently having a robust showing, the rating agencies are looking at it from a cyclical point of view.
"The sector is in a period right now of improved performance," said Dean. "That doesn't mean it will stay there. We can return to nomalized levels or go from very good to very bad."
