Credit Card Users Pay Off Less,Signaling Higher Future Losses
17 Marzo 2009 - 9:25PM
Dow Jones News
Credit card users are paying back less of their outstanding
balances each month, data from February show, setting the stage for
deeper pain for issuers of plastic.
A sustained decline in the amount borrowers repay each month,
compared with a year earlier, is a leading indicator of credit
losses. Analysts are concerned that more customers won't be able to
pay at all, forcing issuers to write off loans. This would mean
heavier losses on credit card debt already battered by rising
unemployment.
"Payment rates are a forecasting tool for delinquencies and
charge-offs," says Scott Valentin, an analyst at FBR Capital
Markets. "Lower payment rates signal consumer distress."
Card users paid back 17.15% of their balance on average in
February, down from 20.46% a year earlier, according to a Fitch
Ratings index, which tracks about $285 billion of credit card
loans.
Lower payments are actually desirable in a strong economy; when
customers pay a minimum balance each month, issuers collect more
interest on the unpaid balances. But this pattern is worrisome in
an economic downturn because lower payment rates are a sign that
borrowers will fall behind on payments.
Higher delinquencies force issuers to squirrel away capital to
reserve for potential losses; ultimately, companies must write off
loans if customers can't pay up. That could mean trouble for card
issuers such as Citigroup Inc. (C), Bank of America Corp. (BAC),
American Express Co. (AXP), Capital One Financial Corp. (COF),
Discover Financial Services (DFS) and JPMorgan Chase & Co.
(JPM).
The annualized charge-off rate, measuring defaults as a
percentage of loans outstanding, rose to 7.74% in January from
5.48% a year earlier, according to Moody's Investors Service. That
rate is already historically high; it peaked at just over 7% during
the 1991 and 2001 recessions, according to Moody's.
Individually, American Express's card users paid down 22.23% of
their balances in February, down from 22.44% a month earlier,
according to data on credit card loans released Monday. Similarly,
Capital One borrowers paid down 13.7% of their balances last month,
down from 15.33% in January. The data, released monthly by issuers
of plastic, track the performance of credit card loans that are
packaged and sold to investors, and are considered an accurate
gauge of payment trends.
"As consumers are more cash strapped, they pay less and keep
higher balances" on their credit cards, says Chris Wolfe, an
analyst at Fitch Ratings.
Data also indicate borrowers are struggling to catch up on
missed credit card payments. American Express's monthly data on
credit card debt performance note that the percentage of
cardholders who went from skipping two-to-three payments to more
than three payments rose to 71.6% last month, from 62.1% a year
earlier, according to FBR's Valentin. Typically, once borrowers are
three payments behind, fewer of them ever catch up.
Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods,
notes that the average life of a credit card loan was longer at
about 6.7 months in January, compared with 5.8 months a year
ago.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com