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Drop in Credit Card Defaults Points to Economic Recovery

March has proved to be a tricky month in recent years for consumers to keep on top of their credit card payments after holiday shopping trips. This year, delinquency and default rates in March dropped, and the balances that credit card issuers had to charge off as uncollectible declined.

Assuring Lows in Credit Card Industry

The top credit card companies — Chase, Bank of America, Discover, Capital One, Citibank and American Express — reported a drop in delinquency and charge-off rates in March. In fact, both rates are the lowest they’ve been since mid-2008.

Capital One and Discover boasted the greatest improvements in delinquency rates and credit card defaults this month, according to The Associated Press. Bank of America reported the highest delinquency rate at 4.82% of balances, while American Express reported the lowest delinquency rate at 1.8% of balances.

According to the Federal Reserve, overall charge-off rates dropped in the fourth quarter of 2010 to 7.7% of balances from a high of 10.9% in the second quarter of that year. Bank of America and Discover reported the greatest improvements in their charge-off rates. Bank of America’s charge-off rate was still the highest among top credit card issuers at 8.18%, while American Express had the lowest rate at 3.7%.

According to Moody’s Investors Service, it is likely we will see this trend continue in the coming months. The drop in delinquency rates is a particularly good sign, a Moody’s analyst told The AP.

Consumers Improve Delinquency Rates

The post-holiday months can be a challenging time for consumers, yet they seem to have a stronger foothold in the management of their bills as the economy gradually recovers. The increase in employment rates certainly helps consumers to better manage their finances, but many of us have also learned to be smarter, more cost-efficient shoppers in the face of economic challenges. Both these factors might contribute to the drop in delinquent payments, which is defined as a payment that is at least 30 days late.

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Consumer Spending Drives Economic Growth

The economy has been kicking back into gear, and consumer spending plays a big role in driving this upswing, as it accounts for 70% of the economy. With the recent profit increases credit card companies have seen, it seems consumers are back out there using their cards to make purchases instead of cash or debit cards. As card companies report increasing earnings, mailboxes are filling with credit card applications once again.

Increase in Consumer Spending

As mentioned in a previous Credit-Land.com article, after this past holiday season, consumers in all income brackets said they had no intention of putting a hold on their spending this year. The holiday season might remind consumers it can also be fun to shop for ourselves once in a while. Also, with unemployment rates decreasing, consumers who have kept to a strict budget might be letting loose for a change, an maybe filling out a credit card application or two, because they can finally afford to do so. Consumers have more confidence in the slowly improving economy and are less worried about keeping a tight budget and saving money. This is shown in a report by the U.S. Bureau of Economic Analysis, which reported a 4% increase in consumer spending in the fourth quarter of 2010. This is the largest percentage increase in 5 years.

Consumers Not Afraid to Use Their Credit Cards

With a decrease in credit card delinquency in the fourth quarter of 2010, it seems consumers are more confident in their financial position. Because they are making more of their payments on time, cardholders are facing fewer late payment fees and interest rate hikes. This is most likely encouraging to consumers, who feel secure to once again use their credit cards for purchases.

Credit Card Companies See Increases All Across the Board

Of course if people are spending more money, it’s no surprise they are using their credit cards more, too. Credit card companies are seeing an increase in their net income and in card member spending. For instance, American Express reported net income of $1.1 billion in the fourth quarter of 2010, compared with $716 million a year earlier. A large percentage of this gain can be attributed to cardholders charging more to their credit cards.

 

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Declining Credit Card Delinquencies Suggest Financial Crisis Recovery

Financial experts and economists have been suggesting that the U.S. economy is in recovery, and now the proof may be in the numbers. American consumers have been making more timely payments to their credit card issuers. In February, the number of delinquent and charged off credit loans and accounts were down. In addition to making their payments on time, consumers are still spending less, which in turn means that credit card companies are earning less money. Have consumers finally learned to live within their means, or is this a temporary trend?

Financial recovery in the works?

Credit Card Spending

The February data for credit card and other consuming spending is not out yet. You can, however, make some observations from January data. For example, credit card balances declined by $4.25 billion in January. This was a 4% decrease when comparing it to the $2.02 increase in spending that took place in December of 2010. Most financial experts attribute the December increase to holiday shopping, however this was the first month that spending had increased since the summer of 2008.

Expectations for spending in February are an increase in consumer spending, especially in the retail sector. The increase is relatively small, only about 1%. When it comes to spending on other types of purchases, though, spending is up in a big way and expected to continue that way.

Types of Purchases

The types of spending consumers seem to be gravitating to is on big-ticket items such as vehicles, boats and vacations. Hybrid vehicle purchases on the Toyota Prius increased by 69.9% in February. Overall, auto sales are up 17%. As consumers search for ways to cut back on gas consumption and to save money at the pump in the process, an increase in purchases of hybrid and good gas mileage vehicles is expected to continue.

Whether or not the U.S. economy is in full recovery mode is yet to be seem. In the meantime, there are some positive signs that this is the case. A decrease in delinquent credit card payments and charge off accounts and an increase in consumer spending are all symptoms that suggest the financial crisis is coming to an end.