Recovery Performance May Prove Resilient Despite Increasing Challenges

July 30th, 2008

U.S. consumer attitude toward the economy has deteriorated throughout the year with no signs of reversal. Numerous factors have left many households feeling vulnerable when assessing their financial situations.

Along with the continued slide of the housing market, job security is an ever-pressing issue. The unemployment rate has increased from 4.9% in the first quarter of the year to 5.5% in June. Also grabbing headlines has been the rising cost of food and fuel. With the average price of gasoline above $4.00 a gallon, many consumers are tightening budgets as a response to the increased financial strain. Though April’s consumer credit report by the Federal Reserve hinted at a slowdown in the growth of revolving (or credit card-related) debt, with an annual growth rate for the month of -0.5%, May’s report of a 7.1% expansion shows that the increasing cost of household goods will be a major factor in pushing continued credit use.

It is still unclear if credit card debt growth will suffer any marked slowdown and whether consumers will further reduce their discretionary spending; but what is clear is that the deterioration in the quality of outstanding credit card debt witnessed over the past year has continued. In May the charge-off rate for the U.S. Credit Card Quality Index (CCQI) – an index tracked by Standard & Poor’s – rose to 5.96%, up nearly 37% from the prior year’s rate of 4.36%, a clear indication of the continued challenges faced by creditors in effectively collecting outstanding credit card debt. The index monitors the performance of receivables held in master trusts of bank card and credit card-backed securities.

Like charge-offs, delinquencies have also trended upward over the past year, but they actually improved in May. The May delinquency rate among the credit card master trusts in the CCQI experienced its second month of declines, dropping from the 4.43% reported in April to 4.33% in May.

Although the 4.33% delinquency rate still marked an almost 20% increase from the 3.62% rate reported in May of 2007, the recent decline does suggest that creditors are responding to the current credit environment. With increasing charge-offs across a broad spectrum of credit types, many issuers have hinted that they are augmenting their recovery strategy by increasing pre charge-off recovery efforts.

In addition, this recent decline in the delinquency rate may also suggest that because issuers have suffered so greatly from the combination of the credit crisis, slowed economy, and housing market slowdown, recovery performance has become an increased focal point. As a result, recoveries could remain stable in the face of these challenges. This sentiment was echoed in the recent Kaulkin Ginsberg Creditor Confidence Survey, where 71.5% of issuers had a favorable opinion of current internal recovery performance and 80% of these creditor respondents predicted favorable internal recovery performance by 2009.


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