Taken with the most recent of government releases, Fitch IBCA’s monthly Credit Card indexes paint a somewhat paradoxical picture of consumer behavior that shows credit card debt being repaid at record rates as spending and borrowing patterns soar. Viewed with the Federal Reserve’s consumer credit statistics, Fitch IBCA’s index results may yield some valuable clues to understanding consumers’ overall financial positions as detailed in the latest edition of `Credit Card Movers and Shakers’.
Fitch IBCA’s index results for August’s collection period show chargeoffs, serious delinquencies, and excess spread on securitized pools improving broadly and personal bankruptcy filings declining sharply versus year earlier levels. In addition, monthly payment rates arose to their highest level in eight-plus years.
Consumers are piling debt at several levels to purchase everything from computers to automobiles to everyday household items for their new homes. So much so, that year- to-year growth in total consumer credit–revolving (cards) and non-revolving (autos)–is now over 7% and accelerating.
`While troubling at first glance, it appears less so after noting that Fed statistics for revolving credit do not net out monthly payments made on credit card balances. Rather, they track only the gross purchases made on credit cards for a given month,’ said Michael Dean, senior director of the credit card group. `Therefore, to the extent charge volume rises, so too will the revolving component of consumer credit. Which is why MPRs take on added importance when judging overall consumer leverage.’
While this is not new information, Fitch IBCA believes the current level of MPRs may be sustainable given shifts in underlying card usage behavior. Those shifts include a portion of traditional retail cash purchases being replaced by credit purchases on the internet, as well as the ongoing widespread use of rewards cards, and consumers’ rising personal incomes. Previous explanations focused mainly on cash out mortgage refinancings and home equity loans as sources of the higher payment rates. Those sources, however, have dried up considerably over the past six months due to higher interest rates with no impact to the rising payment rate environment.
If the higher MPR trend does prove sustainable, it spells a clear positive for credit card ABS bondholders. Higher payment rates return principal faster in a deteriorating credit environment, meaning bondholders will be subject to rising portfolio losses for a shorter period.
For a copy of `Credit Card, Movers and Shakers’ please visit Fitch IBCA’s website at [www.fitchibca.com] or call market services at 1-212-908-0500.