Credit-Card Borrowers Still Paying the Bills, Easing Concerns
08/15/2012| 04:59pm US/Eastern
By Andrew R. Johnson
Customers of the largest credit-card issuers largely continued to pay their bills on time in July, bucking growing concerns that consumers are again facing financial hardship.
A rash of dour economic reports in recent months has raised worries that consumers could fall behind on their debt payments, raising costs for banks that have already written off billions of dollars of soured loans since the financial crisis.
Credit-card lending in particular has been a bright spot for big banks since the recession ended because consumers have made paying their monthly bills a priority and been hesitant to carry large balances. That has allowed lenders to boost earnings by setting aside less money to cover potential loan losses, and it more recently led some banks to loosen their loan criteria.
The continued improvement is likely due to prolonged levels of relatively high unemployment, which continues to weigh on consumers' minds, said Ezra Becker, vice president of research and consulting for the financial-services unit of credit bureau TransUnion.
"For many consumers, that credit card has become more important than ever," Mr. Becker said. "The value of the card as a primary source of liquidity is critical," which has caused consumers to be diligent about paying their bills on time and be cautious about how they spend.
TransUnion on Tuesday said the national credit-card delinquency rate fell to 0.63% in the second quarter from 0.73% in the first quarter. The rate, which measures the percentage of borrowers who are 90 or more days late on a payment, was 0.6% a year earlier.
Major credit-card issuers including Discover Financial Services (>> Discover Financial Services), Bank of America Corp. (>> Bank of America Corp) and Capital One Financial Corp. (>> Capital One Financial Corp.) said Wednesday that their portfolios continued to improve in July, with delinquency rates and net charge-offs - loans lenders deem uncollectible - falling for most.
The results were included in reports large credit-card issuers file monthly with the Securities and Exchange Commission.
Discover said its delinquency rate in July was 1.83%, down from 1.88% in June. The Riverwoods, Ill.-based lender's figures pertain to loans packaged in to securities, and unlike TransUnion's figures, look at the percentage of loan balances that are 30 or more days past due.
Capital One, which acquired the U.S. credit-card business of HSBC Holdings PLC (>> HSBC Holdings plc) in May, also saw its delinquency rate decline in July, though it has warned the addition of the new portfolio could lead to increases in the future. The rate fell to 3.09% from 3.16% in June.
Bank of America, which has been revamping its credit-card products to attract more frequent travelers and affluent spenders, said its delinquency rate declined to 3.17% in July from 3.23% in June, though its net charge-off rate, or percentage of loan balances deemed uncollectible, increased to 5.05% from 5.04% in June.
American Express Co. (>> American Express Company), the largest U.S. credit-card lender based on spending, saw both its delinquency and net charge-off rate remain flat at 1.2% and 2%, respectively. The New York-based lender primarily targets affluent borrowers, a segment other credit-card issuers have been targeting in hopes of attracting customers who use their cards frequently but are good about paying on time.
"I don't see consumers significantly ramping up their appetite for debt over the foreseeable future, and I believe we're a far stronger company because we're not reliant on rising debt levels to generate our revenue growth," Ken Chenault, chairman and chief executive officer of American Express, said during an investor presentation last week.
Prior to the financial crisis, many lenders relied on interest charges on revolving loan balances and late fees to boost revenue. With consumers less likely to carry balances, banks have been forced to look for new areas for growth.
Some lenders have loosened their underwriting standards in the last year to attract a wider array of customers.
The Federal Reserve reported last week in its quarterly senior loan officer survey that some banks have eased standards for credit cards and other consumer loans. Moody's Investors Service last month cited easing standards as one reason why it expects revolving credit to rebound in the coming year. The rationale is the easier it is to obtain credit, the more likely it is balances will grow.
"Credit card losses are approaching historical lows despite high unemployment and weak income growth," Moody's said in a report. "This suggests there is considerable room for easing standards and incentives for lenders to maximize their profits."
Loose standards are a key factor that caused credit-card losses to balloon for many banks during the financial crisis. While easier requirements to qualify for a card could increase risk for banks, Mr. Becker said losses remain so low and criteria for banks continue to be significantly more stringent than before the recession.
"Underwriting has been extremely conservative over the past couple of years," Mr. Becker said. Lenders aren't "opening the flood gates and giving credit to anyone who has a heart beat."
Write to Andrew R. Johnson at email@example.com
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