March 10, 2009
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News: Delinquencies? Is there an inflexion?
TransUnion reports an 11% drop in credit card delinquencies for last quarter while Fitch reports a 23% increase this quarter. Are they measuring things differently here or do we have a major change in direction? According to Fitch's "Prime Credit Card Delinquency Index", delinquencies above level 1 (60 days or more) have jumped another 4.04%, shattering the former record high set just last month (3.75%). A 23% increase in credit card delinquencies over the last three months. Let's see, we know that 4.04% was the highest and that 3.75% was the second highest ( they were both all time records). That must mean that: 4.04% + 3.75% + X% = 23%; where X (rate from 2 months ago) is less than 3.75%. I dunno, must be ‘fuzzy math'.
So now, we're 30% beyond any record in history (at least since 1991 CE) for credit card delinquencies. In fairness, this news may be accurate, but the hype isn't. After all, as Michael Dean, managing director at Fitch, might say: "As the unemployment rate accelerates and consumers' ability to service their debt weakens, cash-strapped American consumers are not paying credit card bills on time". Not exactly rocket science though, is it?
There is a harbinger present, however. In the past, it's been found that credit card total defaults (charge-offs) trail delinquencies which trail unemployment changes. It's not far off to expect the endpoints of the chain to differ by about 1.5%. So, if unemployment were to be 8.9%, we might expect charge-offs (uncollectible debt) to be 7.4. If unemployment were to reach 10.5% within a year (as it's expected to) then, it shouldn't be a surprise to see charge-offs reach 8.5%.
Not good news but, neither should it be hyped. The fact is that, in the end, credit card charge-offs will dwindle much more quickly than unemployment figures. Lenders are already much more prudent. Borrowers are already much more prudent. But, all those millions of good-paying American jobs aren't coming back from overseas anytime soon. Just common sense here.