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Monday, August 17, 2009
Credit Trends are helping Credit Card Companies
The creditors are making money while we suffer.
Most major credit card companies say fewer customers defaulted on their accounts in July, but that doesn't necessarily mean they're financially better off.
A few credit card issuers say more families fell behind on payments, which could be another sign that household finances have yet to recover from the recession.
With more than 6 million people living on unemployment benefits and the recession continuing to pressure family budgets, many are forced to prioritize their bills. The reality is that credit cards often fall to the bottom.
Credit card companies have been trying to limit their risk over the course of the last year. Major credit card issuers reporting monthly results say the rate of losses from unpaid accounts improved from June to July.
American Express Co., Bank of America Corp., Capital One Financial Corp., Citigroup Inc., Discover Financial Services and JPMorgan Chase & Co. all say the number of account balances written off due to nonpayment fell.
American Express, for example, said its net loss rate fell to 8.92 percent in July from 10.18 percent the month before. Bank of America fell to 13.81 from 13.86 and Chase saw a drop to 7.92 percent from 8.04.
What's more, most of the major card issuers also reported more customers making payments on time.
The positive trends don't necessarily mean consumers are suddenly in much better financial shape.
Some of the uptick is more likely due to credit card companies culling the riskiest customers, which will in time lower default and delinquency rates, said bank industry analyst Richard Bove of Rochdale Securities.
He sees little to point to a significant improvement in the financial health of consumers.
Unemployment remains high and will remain elevated for months and the average household wealth is lower due to falling real estate values.
"It doesn't appear that the recovery in the economy, which seems to be in place at the moment, is going to do anything to change those metrics," he said. "Unemployment is going to stay high and it doesn't appear housing prices will soar anytime soon, either."
The slight increase in the monthly credit card data also could be attributed to the fact that consumers are striving to maintain a good relationship with their card companies, said Ezra Becker, a consultant for TransUnion LLC, a leading consumer credit rating company.
"They recognize that in a recession their credit cards are their primary cash equivalent resource," Becker said. "Credit cards really help a lot of people make it from paycheck to paycheck or tide them over in periods of unemployment."
Overall statistics show that credit card balances are declining as consumers work to pay off debt.
Revolving credit has fallen for nine consecutive months beginning last October and continuing through June. The Federal Reserve Board says that's the longest pullback in more than 40 years.
Still, of the major companies reporting monthly results, Capital One, Discover and CitiBank reported an increase in the number of customers falling behind on payments due more than 30 days. Customers delinquent from 30 to 59 days rose for Capital One and Citibank.
The mixed results may simply show that some credit card companies were able to manage credit problems more efficiently than others as the economy deteriorated.
"What this tells you is the issuers are in different stages of recovery," said John Ulzheimer, president of consumer education for Credit.com, an online financial services company. "Some issuers did a better job of jumping on the problem more aggressively early on and those are the guys coming out a little bit earlier smelling like a rose."
Some analysts expect losses from unpaid accounts to increase over the next few months before stabilizing at an elevated level. In part because more consumers typically fall behind on payments in the last half of the year as holiday spending increases and some overspend.
The factor most affecting credit currently, however, is unemployment.
"We believe that further increases in the unemployment rate could cause a second spike in credit losses in the second half of the year," wrote Credit Suisse analyst Moshe Orenbuch in a Monday note to investors.
Although some economists are predicting the recession has ended or is near the end, the credit health of most families will lag behind the broader economic uptick.
"We're not really out of the woods yet from a credit perspective. The consumer is still facing difficult times for the next several months," TransUnion's Becker said. "I think we can temper that with some cautious optimism that it does look like there's a light at the end of the tunnel."