Credit card defaults will reach a 20-year low by next year, Moody's Investors Service said Monday, as card issuers remain choosier in their lending practices.
After writing off billions in uncollectible credit card debt over the past few years, banks have started to hand out new cards again. But they are doing so slowly and only lending to those with higher credit scores. Overall, such a large number of borrowers were eliminated from the credit pool that it will take years to replace those accounts, analyst Luisa De Gaetano said in an interview.
In 2009 and 2010, defaults totaled a combined $74.5 billion at just the top six banks that issue credit cards _ Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Capital One Financial Corp., American Express Co. and Discover Financial Services, according to Moody's. That doesn't take into account smaller banks or retail cards. The default, or charge-off, rate peaked in the second quarter of 2010 at 10.9 percent.
While consumer research firms and an important Federal Reserve banker survey have found that banks are easing lending standards a bit, it remains tough for those with the lowest credit scores to get cards. The riskiest card customers, those individuals who had cards shut down because they couldn't pay their bills, are unlikely to be able to get new cards in the near future.
Because of the tighter lending standards, Moody's predicts that the top six card issuers are likely to see their default rate drop next year to less than 4 percent of total balances on an annualized basis.
The low will come despite persistent unemployment, which Moody's expects will remain above 8 percent. Data from across the industry shows that those who still have credit cards have gotten far better about making on-time payments. In recent months, the six banks have reported multi-year lows on delinquent payments. That bodes well for charge-offs in the future.
The improvements come at a time when cards are getting used more often. MasterCard Inc. and Visa Inc. last week reported gains in the number of transactions processed in the first quarter. And the Federal Reserve reported a 2.9 percent rise in outstanding revolving credit balances for March, after declining steadily since 2008.