Credit cards, other loans see delinquencies drop to pre-recession lows

Consumers have spent a considerable amount of time and resources focusing on paying down their various outstanding loan balances in recent months as they try to improve their credit scores, and new statistics show they’ve been incredibly successful.

Instances of delinquency on nearly all types of consumer loans fell once again in the first three months of the year to levels not seen since 2007, according to the Consumer Credit Delinquency Bulletin issued quarterly by the American Bankers Association. The composite ratio for all 11 loan types tracked by the ABA dropped to 2.35 percent of all outstanding balances that were 30 days or more past due, the best rate seen in five years and now slightly below the average level seen in the last 15 years, which stands at 2.4 percent. However, 10 of the ABA’s tracked loan types saw delinquencies decline in the quarter, compared with all 11 in the final three months of last year.

Nonetheless, the ABA said these changes were rather encouraging, and the only category in which delinquencies increased were home equity lines of credit, the report said. However, much of that was likely due to the still uncertain housing market, which has led this type of credit to become unnaturally elevated, and will likely cause it to remain that way for a long period of time. Altogether, delinquency for home equity lines of credit rose to 1.78 percent in the first quarter of the year, from 1.69 percent.

“This is another strong quarter of improving delinquencies,” said ABA chief economist James Chessen. “Consumers have done a remarkable job getting their finances under control. Improvement was all the more remarkable when you consider that gas prices rose 66 cents a gallon in the first quarter alone. That’s a significant amount of money that was diverted from other uses, including paying off debt. Gas prices have fallen 48 cents a gallon since the first quarter so that pressure has abated somewhat and freed up precious resources.”

Credit card delinquencies continue to show marked improvement

Rising gas prices tend to put a lot of strain on consumers’ wallets, and therefore leads many who could not otherwise afford the higher bills to put their fuel purchases on their credit cards. So it may have been somewhat surprising to analysts that the rate at which consumers fell behind on their credit card bills continued to fall in the first quarter, the report said. In all, credit card delinquencies dipped to 3.08 percent from 3.17 percent in the final quarter of 2011. That was the lowest level seen since 2001, and well below the 15-year average delinquency rate for this type of credit, which stands at 3.93 percent.

As a result of all the improvements in delinquency rates for all types of consumer loans, Americans are likely in their best financial position to continue making steady contributions to all their various obligations, the report said. Currently, debt levels are down considerably from the rates seen during and immediately following the recession, when consumers had to rely more heavily on credit to make ends meet. And at the same time, the rates at which consumers are able to contribute to their savings have increased accordingly, meaning that those who take a short-term financial hit may now be in a better position to absorb it. During the recession, millions of consumers found themselves out of work and unable to pay many of their monthly bills, which in turn led to sky-high instances of both delinquency and default, and led to lenders charging off billions of dollars worth of outstanding debt.

However, the continued improvements might have some negative impact in the future, as experts continue to predict that levels must logically bottom out at some point, the report said. Most delinquency rates are now in line with the all-time historical norms, and given that the economy has slowed somewhat in the last few months, it’s unlikely that they will continue to improve down the road. At the same time, some analysts worry about the future state of the economy in general, and that might lead banks to re-tighten lending standards for many types of credit, which had broadened in recent months.

On the other hand, experts have long been predicting that instances of delinquency and default, particularly where credit cards are concerned, would bottom out in the near future, and they have not done so yet despite falling well below both recent and all-time averages. This may indicate that consumers are generally more cautious about dealing with these kinds of balances and making more conscientious efforts to pay down their debts, figure out how to repair credit, and keep building healthier ratings.

Posted in Finance
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