Credit defaults increased in October

Today, many Americans are in better financial shape than they were just a year ago, but occasionally, economic indicators show the intermittent struggles some still face. That was true in October, when defaults on consumer credit ticked upward overall.

Most loan types saw an increase in consumers falling so far behind on payments last month that lenders had to write the balances off as being uncollectable, according to the latest monthly Standard and Poor’s/Experian Consumer Credit Default Indices. Overall, the rate of default across the board, which is not seasonally adjusted, climbed to 1.55 percent of all outstanding balances, from September’s rate of 1.46 percent, marking the first increase in nine months.

“After three quarters of declining consumer credit default rates, national composite increased in October,” said David Blitzer, managing director and chairman of the Index Committee for S&P Dow Jones Indices. “Overall consumer credit quality remains healthy. Looking across our 10 headline indices, all are at levels typical of the pre-crisis period of the early 2000s. Only one – bank card – shows default rate[s] above 2.5 percent and even that hit the recent low, which is close to its eight-year historic minimum.”

Inside the increases
Of the four major types of consumer credit examined in the indices, three rose on a month-over-month basis, though to varying degrees, the report said. The largest increase came in defaults on first mortgages, which rose to 1.47 percent in October from the previous month’s 1.36 percent. However, that was still down significantly from the 2.08 percent seen in the same month last year.

The next-largest increase came as a result of more people falling behind on their auto loan payments, the report said. Defaults in this area accounted for 1.14 percent of all outstanding loans, a slight increase from September’s 1.11 percent, but the rate was at 1.22 percent in October 2011.

Finally, second mortgage defaults rose by a very slim margin, rising one basis point from September to 0.65 percent of all such loans, the report said. That was nearly half the 1.29 percent of defaults seen for the loan type a year prior.

Late credit card payments continue to tumble
Meanwhile, the rate of default on consumers’ credit card accounts fell once again, though only somewhat, the report said. Charge offs for these cards slipped to 3.68 percent from 3.7 percent, another post-recession low. At that time last year, the default rate hovered at 4.85 percent, indicating that consumers have made tremendous progress in this area in just 12 months.

Many consumers drastically altered their borrowing habits in the wake of the recession and now rely far less heavily on credit cards in general, though experts believe that rates of delinquency and default, as well as debt, will both increase in the final two months of the year, in keeping with late-year norms that typically accompany the holiday shopping season.

However, it’s also important to note that in many cases, lenders are still being somewhat tight-fisted when it comes to extending credit to riskier borrowers, which some analysts say lowers default rates somewhat artificially. It’s believed that credit availability will continue to expand as the economy improves, but the effect of doing so is more difficult to predict.

On a local level
In putting together these indices, Standard and Poor’s and Experian keep tabs on five major metropolitan areas: Chicago, Dallas, Los Angeles, Miami, and New York City, the report said. During the month of October, three of these five cities saw default rates fall, two of them to lows not seen since the start of the recession.

Chicago and Los Angeles led the way with these lows, at 1.78 and 1.44 percent, respectively, the report said. Chicago’s decline was of four basis points, while Los Angeles’ was just one. The lowest default rate of these five cities was seen in Dallas, where 1.26 percent of borrowers had their balances written off, but that was actually a significant increase from September’s level of 1.03 percent. Further, it was far closer to the 1.3 percent seen in October 2011. New York also saw an increase, to 1.35 percent in October from he previous month’s 1.28 percent.

Miami, meanwhile, had the highest default rate of the five major metropolitan areas, at 2.44 percent, though that was down from 2.48 percent in September, and 4.16 percent last year, the report said.

Defaults can have a huge negative effect on a consumer’s credit rating, but so too can unfair markings that end up on their credit reports. For this reason, it’s vital for borrowers to regularly order copies of these documents and check them closely for such entries. If any are found, working with a credit repair law firm may help to remediate the issue.