Credit Card Outlook Remains Negative as Debt Rises

Two separate reports Monday painted a gloomy picture for U.S. credit card issuers even as performance of credit card loans improved slightly in the second quarter of 2008.

TransUnion, in its quarterly analysis of consumer credit card trends, said that after a slight drop in total credit card debt in the first quarter of this year, national credit card debt per credit card borrower increased 2.63 percent in the second quarter. The average credit card borrower had debts of $1,717 at the end of the second quarter.

The steepest increases in average credit card debt over the previous quarter occurred in the District of Columbia (6.62 percent), Alaska (4.84 percent) and Tennessee (4.75 percent).

But TransUnion also reported that credit card delinquencies fell in the quarter. Nationally, the ratio of credit card borrowers delinquent on one or more of their credit cards declined to 1.04 percent in the second quarter of 2008, down 12.6 percent over the previous quarter. However, on a year-over-year basis the national delinquency incidence rate has risen 14.3 percent from 0.91 percent in the second quarter of 2007.

"A number of factors may be in play that could explain the recent downward trend in the national bankcard delinquency rates," said Ezra Becker, principal consultant in TransUnion’s financial services group. "First, the Federal Reserve Board’s Senior Loan Officer Opinion Survey on Bank Lending Practices (updated August 11, 2008) shows that many financial services institutions have tightened their consumer lending policies in 2008 relative to where they were in at the same time last year, the effects of which are now becoming increasingly apparent in delinquency statistics.”

In a separate report, ratings agency Moody’s said that its outlook for the U.S. credit card market remains negative.

“The credit card industry is in the midst of a challenging period and collateral performance will get worse before it gets better,” Moody’s said in the report. Moody’s rates bonds issued by clients that are backed by credit card debt.

Moody’s said that the biggest drivers of credit charge-offs — namely, the unemployment rate and bankruptcy filings — are expected to continue to rise. Card companies are responding to the current economic environment by tightening credit standards, selectively reducing credit lines, limiting credit authorizations, increasing fees and rates, and more diligently pursuing collection strategies.