In the past few months, consumers have generally been able to get a better handle on their overall finances and therefore find themselves in a better position to pay down their various outstanding loans, even if they've fallen behind in the past.
Instances of credit card default slid to levels never seen before and will likely continue to do so, while mortgage delinquency and default maintained the trend of the improvements seen there in the second quarter of the year, according to new data from Fitch Ratings. This may indicate that consumers are now finding themselves in more favorable financial positions, and are prioritizing their most outstanding debts to get all aspects of their credit back on track.
Credit card improvements are significant
Between the months of April and June, the amount of money lost by lenders because of credit card accounts that were so far behind on payments that the institutions controlling them had to write off the outstanding balances as being uncollectable slipped to the lowest point ever, the report said. That bodes particularly well for consumers' appetites to begin borrowing again in earnest during the third quarter of the year and beyond.
In fact, for the nation's six largest credit card issuers, losses due to charge offs accounted for just 3.7 percent of all outstanding balances during the second quarter, down from 4.01 percent in the first quarter, the report said. Further, that number was also a significant drop from the average 6.68 percent default rate observed between 2007 and 2011.
A deeper look at the numbers
A careful look at the financial data released by one of these major lenders, Discover Financial Services, shows the breadth of improvements across the lending environment during this time, the report said. The company saw its charge off rate decline to 2.43 percent in the third quarter, from 2.69 percent in the first, and the latest level is an all-time low. Meanwhile, 30-day credit card delinquency accounted for just 1.81 percent of balances, down from 1.91 percent.
Likewise, the lender saw the value of its portfolio expand during that time, marking the fifth straight quarter in which it did, the report said. In that time, the total number of accounts it controls has grown 3.8 percent, and purchase volumes have similarly increased 3.5 percent on a year-over-year basis.
Reason for the declines
This change may have been somewhat surprising given that national unemployment rates have been a little stagnant in the previous several months, though it has declined both 7.4 percent on an annual basis through August 25, and 42.1 percent from the all-time high observed in March 2009, the report said. Nonetheless, Fitch believes that stabilizing instances of 30-day credit card delinquency indicates that defaults will similarly bottom out in the near future.
These improvements may generally indicate that consumer interest in obtaining new lines of credit will continue to grow in the near future, which could in turn lead to a larger number of charge offs in the coming months, the report said. However, this will likely be a return to the normal historical averages, rather than an indicator that consumers are once again seeing increases in their financial difficulties. The growth of lenders' portfolios will be further driven by the increase in consumer desire to spend on these accounts, especially given that consumers may be more comfortable dealing with new debt loads as the economy and their attitudes toward borrowing continue to improve.
In fact, consumers seem to have already re-acquired a taste for borrowing on these accounts, the report said. While data from the U.S. Federal Reserve Board shows the amount of revolving credit carried by consumers dipped for 11 consecutive quarters, that streak ended in the final three months of 2011. At that time, the value of outstanding balances grew 0.2 percent. That rate then increased another 0.5 percent in the first quarter and, most recently, expanded 0.6 percent in the three-month period ending in June. This kind of growth is expected to continue for the majority of next year at least, and could reach the low- to mid-single digits over that period of time.
If you're seeing your finances improve and believe you can therefore be in a better position to improve your credit score, you might want to order a copy of your credit report as well. By doing so, you can review this document closely to see if there are any unfair markings which may be having a negative impact on your overall standing. If such markings appear, you may be able to work with a credit repair law firm to clear up these errant entries and return your credit rating to where it deserves to be.