Credit Card Use Spikes Just as Defaults Stall

Credit card default rates have stabilized -- a sign that 1) consumers are handling their money more cautiously; or 2) banks have just become more selective about the consumers they approve for cards.

Most likely, it's a little of both. As the recession deepened, banks tightened lending standards. That made it increasingly difficult for consumers with low credit scores to get new cards or continue to use ones they had.

Banks are starting to ease lending standards: According to a new survey from the Federal Reserve, about 20 percent of banks have loosened requirements for approving credit card applications. But the easing is concentrated at large banks, and the riskiest card customers, especially those who lost their cards because of late or missed payments, are unlikely to get new ones in the near future.

Most remaining credit users are either exceptionally prudent or too afraid of losing their own cards to pay late. According to Moody's Investors Service, credit card defaults will reach a 20-year low by next year because issuers will maintain selective lending practices.

But even though defaults have stabilized, credit card use increased last month. Card transactions increased nearly 5%, and the value of the average transaction increased more than 7%, according to First Data Corp., a global electronic commerce and payment processor. The company warned rising food and gasoline prices may be eroding consumers' discretionary purchasing power.

The question is whether consumers will try to increase their liquidity by charging more frequently, a move that could boost card balances, increase minimum payments, and potentially upset the stability shown in default rates.

For now, consumers aren't pushing to get new credit cards. Only a few banks responding to the April 2011 Fed Survey on banking practices report an increase in the number of credit card applications in the past three months. Nor has there been any noticeable increase by consumers with questionable credit to apply for new cards.

Both Moody's and Fitch Ratings report US charge card default rates are falling, while a third index, jointly developed by Standard & Poor's and Experian (LON: EXPN), showed a slight uptick in the past 30 days. According to the S&P/Experian Consumer Credit Default Index, credit card charge-offs edged up 0.2% to 5.91%. But even so, the rate is more than 35% better than the default rate a year ago.

Overall, credit card issuers report improvements. The number of consumer credit accounts deemed uncollectible in April declined for American Express Co. (NYSE: AXP), Capital One Financial Corp. (NYSE: COF), JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), and Discover Financial Services (NYSE: DFS), although charge-offs rose at Bank of America Corp. (NYSE: BAC), Moody's reported this week. Default rates have steadily declined for most issuers this year, although they remain above the pre-recession average of 3.82%.

Capital One reported the biggest drop in defaults, down to 4.97% annualized, a level last seen in late 2007. Amex, perhaps because of its more affluent client base, maintained its hold on the lowest default rate, 3.5%

BofA indicated in a regulatory filing Friday that it wrote off credit card balances at an annualized rate of 8.25% in April, up just slightly from 8.18% in March and substantially below the bank's peak rate of 14.53% in August 2009.

The industrywide charge-off rate peaked at 10.9% in the second quarter last year, according to Federal Reserve data. Moody's estimates more than $74 billion in uncollectible debt was written off by the top six card issuers alone in 2009 and 2010.

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