Rise in credit card debt charge-offs

UK consumers are walking away from their credit card debts in rising numbers, according to a report to be issued on Wednesday by Standard & Poor’s, the credit agency.

Average charge-offs – defined as repayments of principal and interest which credit card companies no longer expect to receive – rose to 6.9 per cent by the end of June, up from 6.62 per cent at the end of March.

The latest rise is a reversal of the trend that had seen charge-offs falling since 2005. That was the point at which the number of borrowers seeking to dodge their debts by taking out individual voluntary arrangements peaked.

Debts overdue by more than 180 days are automatically classified as charge-offs, even if recoveries are made later.

Prashant Dwivedi, credit card securities analyst at S&P, said that the rise was all the more surprising because UK card companies had received a rude awakening three years ago as borrowers found loopholes to avoid debt repayment. Since then card companies have tightened lending criteria, raised interest rates and cut individual lines of credit to help limit losses. They imposed tougher standards long before mortgage lenders did so. Also, the performance of some credit card-backed bonds weakened as regulators cut the maximum penalties for late payments that could be charged. The two developments had put the industry on its mettle long before the credit crunch began, Mr Dwivedi said.

“In a sense it was a blessing in disguise,” he said. “They got a wake-up call much earlier [than other lenders].”

The charge-offs are below the 7.9 per cent that prevailed at the peak of popularity for IVAs but still very much above the 3.0 to 3.5 per cent charge-offs seen when credit card-backed bonds first hit the market.

S&P’s own forecast is for charge-offs to rise to 8.5 to 9.0 per cent of balances due, a record high, as UK customers struggle with high inflation, stagnant wages and an expected round of job cuts. However, Mr Dwivedi said S&P did not expect the rate at which credit card charge-offs increased to be anything close to the rate seen in the early 1990s when they doubled, albeit from very low levels.

The report points to the increasing number of personal bankruptcies and IVAs in the second quarter of 2008 as the reason for rising charge-offs. “UK personal bankruptcies and IVAs increased again in Q2 2008, having increased by 8.2 per cent since Q4 2007 and 4.7 per cent since Q1 2008,” the report notes.

It says the performance of bonds backed by European credit card payments are coming more into line with those of the US, where high levels of indebtedness are hitting hard and credit card charge-offs have been rising for more than two years.

Meanwhile, the data also suggest that British consumers are becoming increasingly dependent on their credit cards. Lending continued to increase in the second quarter of 2008 after having bottomed out in March 2005. The average rate of growth in June 2008, on an annualised basis, was 7.1 per cent, the highest growth rate in two years.