US consumers are reported to be defaulting on credit-card payments at a significantly higher rate than last year, which may reflect rising credit card debt because of the serious problems in the housing finance market.
Credit-card companies had to write off 4.58% of payments as uncollectable in the first half of 2007, almost 30% higher year-on-year. Late payments also rose, and the quarterly payment rate – a measure of cardholders’ willingness and ability to repay their debt – fell for the first time in more than four years.
Moody’s, the rating agency, said the trend could be related to the slowdown in the US property market and a fall in the number of borrowers rolling their mortgage debt into new and cheaper home loans.
“The combination of higher interest rates and a softer real estate market diminished the attractiveness of mortgage refinancings in which many borrowers reduced their more expensive credit-card debt by drawing on the equity in their home,” Moody’s said.
However, the ratings agency said that the rate of losses remained well below the 6.29% average seen in 2004, a year before the US enacted a new law that made filing for personal bankruptcy more onerous.
The Wall Street Journal reported last week that some lenders, such as USAA, are nudging up credit-score requirements across their auto loans, credit cards and personal loans. Bank of America Corp. and Capital One Financial Corp. recently raised fees and interest rates for some of their credit-card customers. And this month, Citigroup Inc.'s CitiFinancial Auto started charging higher auto-loan rates for borrowers with less-than-perfect credit.
"In the past few months, we've been tightening up our credit underwriting standards and raising our score cutoffs slightly," Barbara Johnson, vice president of USAA Federal Savings Bank, referring to the bank's credit cards, auto loans and personal loans. The bank has also scaled back credit-line increases in its credit-card business. "We used to offer frequent, automated line increases, and now, we've pulled back on that a little bit," she told the Journal.
The Journal says that card issuers can afford to be more selective about whom they extend credit to and by how much because more consumers -- increasingly locked out of home-equity loans and lines of credit -- are using their credit cards more. This month, for example, the Federal Reserve said consumer credit rose at an annual rate of 6.5% in June to a record $2.459 trillion, the second straight sizable gain. The increase was led by an 8.4% rate of increase for revolving credit, the category that includes credit-card debt.
