Credit Commentary

Credit card losses drop in July

By Zarana on Friday, August 21 2009

Credit card loan defaults, which have risen sharply in recent months, could peak sooner than expected. Better than forecast default rates for July reported by several credit card lenders increased the hope of the worst to end soon.  However, this does not mean the lenders are financially better off, as higher income-tax refunds and federal efforts to stimulate the economy may have affected the default rates in recent months.

The average rate of charge offs declined in July for the first time in nine months. While many analysts expected a decline, the improvement was bigger than anticipated and even Bank of America Corp, one of the industry's most troubled players, showed its first drop in defaults in almost a year. In addition, credit card delinquencies, or late payments, which are a measure of future defaults, eased in July suggesting charge offs could abate further in coming months.

American Express Co, which earlier this month bolstered confidence in credit card issuers after reporting a steep decline in defaults, said delinquencies fell for fifth straight month in July. Also, JPMorgan Chase & Co posted its third consecutive fall in late payments. Chase's default rate fell from 8.04% in June to 7.92% last month.

Credit card defaults usually track unemployment, which is expected to peak at more than 10% by year-end. It was at 9.4% in July. The change in the trend, seen by some analysts as a sign of a turning point, reinforced the idea that bad loans would bottom out sooner than expected. July's data broke a streak of record monthly credit card default records. The average default rate climbed to 10.76% in June, according to rating agency Moody's Investors Service.

Bank of America reported decline in default rate in July to 13.81%, although much higher than the industry average. While the defaults at New York-based Citigroup, fell to 10.03 percent, from 10.51 percent in June.

But it's not all good news from the card companies as Capital One said both charge offs and delinquencies rose slightly in July. Capital One Financial Corp's U.S. credit card defaults and delinquencies rose in July. The default rate increased to 9.83% in July from 9.73% in June. In addition, the accounts at least 30 days delinquent inched up to 4.83% from 4.77%.

Capital One last month posted its third straight quarterly loss. JPMorgan, Citigroup Inc (C.N), and Bank of America have also been posting losses on their credit card businesses in recent quarters. Even if the industry leaves the record losses behind, it will face the biggest regulatory overhaul in at least 20 years.

A new credit card law that goes into effect in February limits interest rates and fees and is expected to hurt the highly concentrated business' revenue.