Hopes Rise As Charge Offs Slow Down

The credit card industry saw some signs of hope last month when major credit card companies Discover, Bank of America and Capital One posted charge off and delinquency rates that were better than what industry watchers expected. This has lead to an upsurge of hope in the credit card industry that the crisis the industry has been struggling with may soon be ending.

Of the three major players in the country’s credit card industry, Bank of America showed the best developments, posting a slight drop in charge off rates and delinquent loans – loans behind 30 days in payment – in January. While Capital One and Discover did report an increase in charge off and delinquency rates, the increase was lesser than what a few analysts expected.

Barclays Capital analyst, Bruce Harting, says that delinquencies seem to be stabilizing and he expects delinquencies and charge offs to see a peak during this quarter.

Consumers are also helping to fuel the recovery of credit card issuers by focusing more on paying off their credit cards even at the cost of defaulting on their home loans. This unusual behavior among home owners runs contrary to the usual pattern where consumers would prioritize their home loan payments at the cost of credit card loan payments. Credit reporting bureau, TransUnion, reported that 6.6% of consumers have kept up with their credit card payments while being delinquent with their mortgage payments during the third quarter of the previous year, 2009. This is an increase over the figures taken during 2008 which only had 4.3% of consumers paying credit card debts while sacrificing mortgage payments.

As consumers focus more on paying off their credit card debts, they are also busy cutting down credit card spending. The outstanding credit card debt right now is approximately $855 billion. In 2008, the outstanding credit card debt was $980 billion. That is a considerable different which is sure to have a huge impact on credit card operations in the country. What is even more troubling for credit card companies is that industry analysts are predicting that the figure will drop by $80 billion more this year. As Moshe Orenbuch of Credit Suisse puts it, “Things are stabilizing, not improving materially”.

The slight improvement in the delinquency and charge off numbers of the banks proved to be good news enough to cause the shares of Bank of America, Discover and Capital One to pick up. Furthermore, it is still unclear whether the increase that Capital One and Discover saw was caused by seasonal behavior. Charge offs traditionally go up early in the year as people try to keep up with the debts from holiday shopping. Analysts say that the worst of the problems credit card companies have been dealing with regarding bad debts may finally be behind them.