Early stage delinquencies are down but charge-offs are on the rise
The U.S. credit card sector posted mixed performance in January as charge-offs rose sharply, while early stage delinquencies declined for a third month in a row, according to Moody’s Investors Service.
The writedown of uncollected credit card debt by lenders, or charge-offs, rose sharply to 11.15 percent in January, while early stage delinquencies fell below the 6 percent mark to 5.96 percent, according to Moody’s Credit Card Indices.
The delinquency rate measures the proportion of account balances for which a monthly payment is more than 30 days late as a percent of the total outstanding balance.
“The improvement in the early-stage delinquency rate was contrary to seasonal patterns that typically lean toward rising early stage delinquencies this time of year,” said William Black, senior vice president at Moody’s.
“This month marks the first January since 2004 where early-stage delinquencies declined from the prior December, an improvement that is an encouraging indication of stability or improvement in charge-off rates by mid-year,” said Black.
Moody’s base expectation is for the unemployment rate to plateau for much of the second half of the year. Under this scenario, and if delinquency rate trends continue to improve, Moody’s expects the charge-off rate to peak close to 12 percent during the next several months.
The 83 basis point climb in the charge-off rate index in January erased much of the improvement in the index since it reached its all-time high of 11.50 percent in August. The charge-off rate measures those credit card account balances written off as uncollectible.
After increasing in December, the payment rate slipped back below 18 percent during January to 17.53 percent. The payment rate measures the average amount of principal that cardholders repay each month.
Moody’s index showed that yields on credit cards fell back below the 22 percent ceiling it pierced in December, ending January at 21.54 percent. Yield is the annualized percentage of income, primarily finance charges and fees, collected during the month as a percent of total loans.
In a sharp contraction, excess spread fell to 7.62 percent from 8.93 percent in December, a direct result of the higher charge-offs and lower yields.
Excess spread is a proxy for the profitability of a card program, and generally represents the yield, or income, of a trust, less expenses such as charge-offs, coupon, and servicing.