Monday, November 28, 2011

Credit Card Delinquency Rate Falls to 16-Year Low

The Federal Reserve recently released data on delinquency and charge-off rates at U.S. commercial banks for the third quarter of 2011.  For consumer credit cards, the delinquency rate fell for the 9th consecutive quarter to 3.47% during the July-September period this year, dropping to the lowest level since a 3.46% reading in the first quarter of 1995, more than 16 years ago (see blue line in chart).  Compared to the 4.35% quarterly average since 1992, the delinquency rate on credit cards is now about a full percentage point below the long-run average. 

For all consumer loans, the third quarter delinquency dropped to 3.15%, the lowest rate since the 2.99% rate in the second quarter of 2007 before the recession started (see red line in chart). The second quarter delinquency rate is also below the 3.34% historical quarterly average since 1992. 

The fact that consumer loan and credit card delinquency rates are back to pre-recession levels and below historical averages is part of the ongoing de-leveraging of American households.  It's also more evidence that the worst of the financial crisis is behind us.  Now if we could just get the Beltway elite to show some of the same financial responsibility that American households have been demonstrating of late. 


At 11/28/2011 10:10 AM, Blogger morganovich said...

it would be interesting to see this data laid over CC debt outstanding.

while it looks positive on its face, it could also be the result of people declaring BK, credit cards being pulled after defaults, etc.

my impression is that the size of credit lines outstanding has contracted quite a bit.

while i certainly think that this is a necessary part of deleveraging and recovery, it does pose some short term headwinds to growth.

you have to be a little careful with indicators like this.

every card in the country being canceled would result in zero delinquencies, but it would be difficult to describe that as a good thing.

the savings rate has been dropping again and is at very low absolute levels.

in general, spending has been going up by more than income all year.

i'm not sure such data are consistent with deleveraging.

this again leads me to wonder whether this CC data is a sign of responsible deleveraging or just a sign that credit lines were pulled and were sold to collection etc. keep in mind that selling your balance to collectors eliminates your delinquency as well but does not de-lever you as all.

this is a very tricky metric to try to use on its own.

At 11/28/2011 11:18 AM, Blogger Buddy R Pacifico said...

Is it not ironic that Mastercard Incorporated has zero long-term debt? This company's leverage is that of its cardholders.

At 11/28/2011 11:24 AM, Blogger Buddy R Pacifico said...

Modification: Mastercard Incorporated has no debt at all; long-term or short-term.

At 11/28/2011 11:31 AM, Blogger morganovich said...


mastercard does not extend credit.

they license their symbol and their processing/POS infrastructure to banks.

the credit is extended by banks, not mastercard itself. thus, the leverage is at citibank, not MC.

At 11/28/2011 1:52 PM, Blogger Buddy R Pacifico said...


"the credit is extended by banks, not mastercard itself. thus, the leverage is at citibank, not MC."

Yes, but indirectly the company is leveraged by its cardholders debt.

Regardless of deleveraging, MC is doing really well. I hope I own a little indirectly through my ETFs & mutual funds.

At 11/28/2011 2:06 PM, Blogger morganovich said...

"Yes, but indirectly the company is leveraged by its cardholders debt."

no, it's not.

there really is no debt leverage there at all.

all interest gets paid to the issuing bank.

mastercard makes it's money as a franchisor and as a processor.

they have no exposure to credit issued at all.

they do benefit from increased transaction volume, but they have no linkage to or leverage/financial impact from balances outstanding on the cards.

that matters only at the issuing bank level.

At 11/28/2011 3:41 PM, Blogger Junkyard_hawg1985 said...

This is something I view as good news for the long term health of the U.S. economy.

At 11/28/2011 5:24 PM, Anonymous Anonymous said...

So, you want to look at this chart in isolation and take some sort of comfort in the fact that the delinquency rate has fallen? I'm not a fan of that type of 'lies, damn lies and statistics' type of methodology.

What happened after the big economic meltdown? Credit card issuers took action to protect themselves from future defaults both out of self-interest and based on the Credit Card Act of 2009.

The result was that credit cards issued far less credit to risky individuals which is likely the reason for the lower delinquency rate. (They may have also potentially written off substantial portions of delinquent accounts since many went into receivership.)

I've got work to do so I can't take the time to do the due diligence necessary here, but it should be done, preferably prior to pronouncements that this statistic heralds some positive consumer trend.


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