Thursday, February 24, 2011

Credit card delinquencies decline sharply

With a HT to Mark Perry (a good source for otherwise-obscure but important economic facts), I'm posting this chart of credit card delinquencies, which uses data compiled by the Fed. My chart covers a longer period than Mark's (using all the data available), and I think it's worthwhile noting that the current delinquency rate (4.2%) is lower than the average of the past 20 years (4.6%) and lower even than the average of the pre-2008 recession period (4.4%). Consumers are deleveraging and they are also getting their financial health back, however painful this process has been.

Update: A reader's question prompted me to add the next chart, which shows credit card chargeoff rates. It strikes me that a customer typically becomes delinquent before the bank writes off his loan; a bank is not going to write off the loan until it is clear that a customer can't or won't pay. And indeed, the charts suggest that delinquency rates peak prior to the peak in chargeoff rates. Delinquencies look like they peak around the end of a recession, while chargeoff rates peak about 6-12 months after a recession. So that suggests that delinquency rates are a leading indicator of chargeoff rates. The picture becomes a little clearer: we see some significant improvement over the past year, and it would appear that things are going to continue to improve, at least from the banks' perspective.


The Lantern said...

How do you interpret delinquency versus charge-off rates? Charge off rates in Q4 were 7.7%, which is VERY high (the avg since 1985 is 4.7%). Would you add the two together to get a sense for a picture of how people are servicing their debt?

puffer said...

Isn't this largely a result of so many people living in homes for free while waiting out the foreclosure process? If they want to keep their credit cards they have to pay on them which becomes a lot easier when you have an extra $2,000/mo in your pocket because you aren't paying your mortgage.