Consumers, Lenders Rein in Credit Card Debt

CU360
April 6, 2009 | COMMENTS

In the face of a stubborn recession, evidence suggests consumers are more carefully managing their credit card debt. The proportion of delinquent credit card payments made during the fourth quarter of 2008 decreased 11% compared with the last three months of 2007, according to figures from TransUnion.com.

Lenders also are taking measures to reduce their exposure to risk. More than one-third of consumers say their credit card issuers have made changes to their accounts recently, according to a Credit.com survey. Fifteen percent have had their interest rates increased and 8% have seen their credit limits lowered.

The TransUnion data indicates that credit card debt rose by 0.33% in the final three months of 2008. Although it's an increase, the rate of increase has been much higher in previous holiday seasons.

There are two factors behind the relatively modest delinquency rate, according to Ezra Becker, director of consulting and strategy in TransUnion's financial services group:

• Lenders are imposing tougher standards and tighter lending criteria.
• Consumers have likely become more conscientious in protecting the credit instruments still available to them, and they're making efforts to pay credit card bills on time.

The national average credit card delinquency rate decreased from 1.36% in the fourth quarter of 2007 to 1.21% in the same period during 2008. "While it doesn't yet signal a turnaround in the economy, the trend in card delinquency indicates that both consumers and risk managers are actively working to control card delinquency, and are having some success," Becker says.

In comparing the current rise in card delinquency to the 2001 recession, Becker notes that the previous recession was relatively short at eight months. The card delinquency rate increased almost 10% during that period. "The national average credit card delinquency rate has already increased 18% since the current recession began in December 2007, with future trends not particularly optimistic," he adds.

The slow economic environment leads TransUnion to forecast credit card delinquencies continuing to rise in 2009, potentially moving near 1.8% by year-end. If the administration's stimulus attempts gain sufficient traction, the credit card delinquency rate could peak in early 2010 and begin to move downward as the unemployment rate starts to fall and the drop in disposable income levels off.