Consumers continue slashing their late payments

Over the last year, consumers have more or less repeatedly cut the rate at which they fall behind on payments into their credit card balances, and that trend will likely continue at least through the end of the year’s second quarter.

The latest statistics from a number of the nation’s largest credit card lenders show that credit card delinquency and default continues to fall, and currently stands at the lowest point seen in years, according to a report from Reuters. Data from Barclays Capital shows the combined delinquency rate for nation’s six biggest credit card issuing financial institutions, which is made up of accounts that are 30 days or more behind on payments, now stands at 2.35 percent of all balances. That’s down from more than 6 percent in 2009.

One of the top lenders leading the way is Discover Financial Services, which recently reported that its delinquency rate slipped to just 1.91 percent, the report said. During the height of the recession, it saw that rate reach as high as 5.6 percent, and chief executive officer David Nelms has noted that he is continually surprised by the declines. As recently as three months ago, the company’s delinquency rate stood at 2.22 percent.

This current state for credit conditions has come over the course of the last few years, the report said. As the economy has slowly improved and more people have been able to find steady work, it has been easier for borrowers to meet their obligations in general. And beyond that, the recent economic downturn and the financial problems related to it seem to have had a tremendous impact on consumers’ card use. In many cases, Americans are borrowing less every month than they were prior to the recession, and more are making concerted efforts to cut their credit card debt to more manageable levels. Data from Equifax shows that outstanding balances on these accounts have fallen $170.4 billion (22.7 percent) since October 2008.

This has been further helped by many lenders keeping credit relatively tight, at least when compared with pre-recession figures, the report said. Though the extension of new lines of credit to subprime consumers has become more common in recent months, many are still keeping it somewhat restricted. Millions of consumers saw themselves flushed out of the borrowing system altogether as a result of defaults during the economic downturn, and anecdotal evidence suggests those who have been able to repair their credit standings and begin borrowing again have generally been more cautious about doing so.

Certain subprime consumers the new target for lenders

Because repairing credit is a process, many consumers are still not where they would like to be with regard to their score, but those who have been at least somewhat successful will likely find that more accounts are now being targeted specifically to them, the report said. Today, lenders are now creating accounts with a certain type of borrower in mind: In particular, they will have a fair amount of disposable income to spend, and a credit rating that’s only slightly lower than what is now considered prime. The hope is that these consumers will once again begin using their credit cards as they did prior to the recession’s onset.

“It is very subtle,” analyst Matt Howlett of Macquarie Securities told the news agency. “It is beginning to reach down ever so slightly into the gray area where you are not prime, but you are not subprime. It is not going to be as dramatic as in other cycles. They probably over-tightened their guidelines and cut-off a lot of borrowers that are good payers.”

In all, about 60 percent of credit cards are now issued to prime borrowers, down about 10 percent from the period three years ago when lending was tightest, the report said. However, that is also up 42 percent from the loosest credit conditions, seen prior to the recession.

For some time now, experts have been predicting that delinquency rates on credit cards would have to reverse direction and start climbing again as lenders continue to expand issuing efforts for subprime borrowers, but that bottoming out has yet to happen. Many now believe it will do so by the end of the year.

Consumers who have seen their credit ratings take a hit in recent years may now be simply smarter about their borrowing efforts, putting only as much on their card every month as they can afford to pay back and generally making larger efforts to reduce their outstanding balances. This in turn gives them more financial flexibility and gives them access to lines of credit with more beneficial terms that can make borrowing more affordable in the future.

Posted in Finance
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