Credit card charge-off rates slow

Bank of America, Capital One and Discover reported better-than-expected charge-off and delinquency rates in January, fuelling hope that the worst of the credit bust may soon be behind the lenders.

Bank of America said current charge-offs and loans at least 30 days overdue fell slightly in January. Discover and Capital One both reported increases – but the rise was less than some analysts had expected.

“It [seems] delinquencies are stabilising,” said Bruce Harting, Barclays Capital analyst. He expects charge-offs and delinquencies to peak this quarter.

Credit card issuers are also benefiting from an unusual phenomenon by which home owners, many of whom owe more on their mortgages than their properties are worth, are choosing to default on home loans to pay credit cards instead. It was formerly the other way round. According to credit bureau Trans-
Union 6.6 per cent of consumers were current on their credit cards but delinquent on mortgages in the third quarter of 2009, up from 4.3 per cent in 2008.

US consumers are still cutting their credit use unprecedentedly. Outstanding credit card debt is about $855bn, down from $980bn in 2008. Analysts see it falling another $80bn this year.

“Things are stabilising, [but] not improving materially,” said Moshe Orenbuch of Credit Suisse. Even a sliver of good news was enough to boost shares of card issuers. At midday, Bank of America, Capital One and Discover were trading higher. Bank of America said loans at least 30 days past due fell to 7.35 per cent in January from 7.44 per cent in December. Uncollectible debt – known as charge-offs – declined to 13.25 per cent from 13.53 per cent the previous month.

Capital One said 30-day delinquencies rose to 5.8 per cent from 5.78 per cent. Write-offs of uncollectible debt were up to 10.41 per cent from 10.14 per cent. Discover’s delinquency rate climbed to 5.55 per cent from 5.49 per cent. Write-offs dipped to 8.58 per cent from 8.68 per cent.

It is unclear how much of the increase was seasonal. Charge-offs tend to rise early in the year as people struggle to pay down debt amassed during the holiday season. Bankruptcy rates increase as spring nears. Analysts said the worst of the bad-debt problem was probably behind the card companies.