Credit Card Performance Declines

The credit card sector can't seem to shake the effects of the mild recession. According to Moody's Investors Services, in the first quarter of 2003 the percent of credit card loans written off as uncollectible rose to the highest level since the third quarter of 1997. Delinquencies rose as well. These data derive from Moody's Credit Card Indexes which track the performance of $380 billion of securitized credit card receivables.

The chargeoff rate (dollar amount of loans written off as uncollectible, as an annualized percentage of total dollars of loans outstanding) for the first quarter of 2003 rose to 6.80% (see the chart below). With the exception of the third quarter of 2002, the quarterly chargeoff rate has risen from its year earlier rate for over two years. The discouraging news for card issuers is that this continued decline in payment performance comes during a period in which interest rates have fallen to the lowest levels in 40 years, and millions of consumers have refinanced mortgage loans and used the proceeds to consolidate their higher cost debt in lower rate mortgage balances. Rising unemployment and rising bankruptcies appear to be driving credit card losses. Moody's reports that, after adjusting for some technical corrections in the indexes, the March 2003 chargeoff rate was the highest in the 14-year history of the index.

Delinquencies also rose in March to 5.48%, up 12 basis points relative to March 2002. This upturn came after a relatively flat trend for the previous several months.

Portolio yield (annualized percentage of income, primarily finance charges and fees, collected during the month, as a percent of total balances outstanding) continued to fall in the first quarter of 2003, for the seventh quarter in a row. First quarter yield was 17.13% compared to 18.19% one year earlier. The declining yield is undoubtedly attributable in large part to the refinancing boom of the past two years. Excess spread (a proxy for a credit card portfolio's profitability), has narrowed for two consecutive quarters. Moody's indicates that the excess spread remains at relatively high levels, but the combination of rising losses and declining yield are squeezing issuer profits.

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