Although many Americans are still struggling financially as a result of the national economic crisis and subsequent recession, data indicates that, in fact, things are slowly getting better. Bankcard charge-offs rates are generally good indicators of the country’s overall financial health. June saw a sharp decline in the average amount of charge offs made by card issuers. It was the second-largest monthly decline in several years, since 2005.
In that year, an unusually high amount of consumers filed for bankruptcy prior to October 17, the date the bankruptcy reform law went into effect which was designed to make it harder for individuals to clear their debts through bankruptcy. As a result, the charge off rate decreased tremendously at that time.
June’s data shows the average charge-off rate to be 6.33%, down from the May’s average which was 7.29%, according to an analysis run by statistical ratings organization Fitch Ratings Inc.
Fitch’s findings for June are “closer in line” with historical averages claims Fitch director Herman Poon, as reported by the Collections and Risk website. Poon went on to say that should present trends continue, charge-off rates likely soon will reach levels considered to be “typical” for the card industry.
Historically, according to data compiled by Fitch since 1991, the average bankcard charge-offs rate is 5.99%. They rose to 11% in the first quarter of 2010, on the heels of the recent recession.
Moody’s Credit Card Indexes has indicated that it expects the rate to drop below 4% by the end of next year, as per a Wall Street Journal article.
Lower consumer spending is helping to keep charge-off rates low. Fitch observed that there was a reduction in consumer spending in June, the first such decline in two years.
“Consumers are still being cautious, but as long as they are charging less and paying off their existing balances faster, we are likely to continue to see the charge-off rate falling further,” Poon said, according to Collections and Risk.
As the economy shows gradual improvement, fewer and fewer cardholders are falling behind on their payments. The delinquency rate has been steadily improving for 21 consecutive months, and is now less than half of what it was in October of 2009, reports Wall Street Journal.
“Delinquencies as a whole have been declining steadily for 18 straight months, and they declined further during June as consumers continued to keep up better with payments,” Poon told the people at Collections and Risk.
Analyst Jeffrey Hibbs is quoted in an article on the WSJ as saying, “charge-offs are expected to decline further given the improvement in delinquency rates, which are often a harbinger of the future charge-off rate trend.”