Throughout the financial crisis, we have been waiting for the last show to drop: credit card defaults. Nearly all of the major banks have entered the credit card industry in recent years, joining forces with Visa to issue cards regionally, and benefitting from windfall profits. With the rise of e-commerce, online shopping has provided a boost to credit card spending, and banks are now dependent on this as a source of revenue – that is, of course, until consumers stop paying their bills. Moody’s publishes an important metric know as the Credit Card Index, which tracks such activity, and the most recent report is a bit troubling.
Today, Moody’s disclosed their November report, which showed that more US credit card users fell further behind on their payments in the month. In addition, the charge-off rate on these cards rose to 10.56 percent last month, after falling for each of the prior two months. In October, the charge off rate was 10.04 percent.
The charge-off rate measures those credit card account balances written off as uncollectable, as an annualized percentage of total outstanding principal balance. The record-high of 10.76 percent was reached in June of this year.
Although the number of people who are paying late rose, the actual dollar value of the delinquent balances is lower that it was in the same period one year ago, which may give some solace to industry insiders closely following this metric.
Traditionally, the delinquency rate rises in the winter, attributed to consumers spending in the holiday season, then taking a few months to catch up to it. As we now know that holiday sales came in stronger than expected, the Moody’s index will be closely watched in the coming weeks, to determine if that spending will provide a real boost to the economy, or if they will merely end up in the charge off bin six months from now.
