NEW YORK, April 27 (Reuters) - U.S. consumer credit quality deteriorated further in February as credit card losses hit record levels amid a worsening economic environment, Fitch Ratings said in a report on Monday.
Fitch’s Charge-Off Index, which tracks the write-down of uncollectable debt by credit card firms, climbed 101 basis points to a record 8.41 percent, eclipsing the prior mark of 7.52 percent reached in November 2005 during the bankruptcy spike.
The charge-off rate has increased 28.01 percent in the past six months and is up 46.77 percent year-over-year. The rate is being amplified by declining asset pools, as issuers continue to tighten underwriting at a time when overall consumer spending is slowing.
“As consumers struggle between surging unemployment and steeper declines in home and equity market values, they have been cutting spending and a larger percentage have fallen behind on their credit card bills,” said Fitch.
The U.S. unemployment rate reached its highest level since 1983 in March, at 8.5 percent, while total revolving credit shrunk an estimated 9.7 percent in February, for the biggest decline since 1978.
Following steep climbs in the prior two months, credit card delinquencies shot to a record high in February. Fitch’s Delinquency Index rose 29 basis points to 4.33 percent, for the third consecutive record high.
Fitch said bankruptcy filings for March surged to 121,413, up 40.9 percent increase from the same period a year ago and up 23.4 percent over February.
Despite the latest results, remedial actions by credit card issuers are providing investors with a cushion against future losses. Portfolio yields increased and excess spread levels, remained robust, said Fitch.
Fitch’s prime index showed a gross yield of 16.83 percent in February, an increase of nearly 83 basis points from January. The increase was largely attributed to Citibank’s Credit Card Issuance Trust, which saw 300 basis points jump in gross yield during the month as its repricing results kicked in.
The higher gross yields and lower funding costs helped to offset higher loss rates, said Fitch. Three-month excess spread, the level of credit support in a transaction, fell by only six basis points to 5.74 percent in February. While 24.07 percent lower on a year-over-year basis, it did not deviate much from its long-term average of 5.48 percent since 1991, said Fitch.
While Fitch’s Monthly Payment Rate Index declined to 15.78 percent from 17.15 percent, the drop was driven by seasonal factors as well as fundamental changes in cardholder payment trends.
“There is usually a slowdown each March, since February has fewer collection days and consumers are paying down holiday balances. In addition, cardholders exhibited some fundamental behavior changes as transactors cut spending, revolvers made smaller payment and more cardholders became delinquent,” said Fitch.
Despite significant regulatory changes scheduled to go into effect for the credit card industry in 2010, several pending and potential bills in Congress could force changes to current business models sooner and accelerate bankruptcy filings, the rating agency warned.
“These proposals seek to restrict a lender’s ability to reprice for changing risk or may result in an acceleration of bankruptcy filings, both of which could cause incremental charge-offs at a time when charge-offs are already elevated due to economic pressures,” Fitch said. (Reporting by Nancy Leinfuss; Editing by Leslie Adler)