Falling Credit Card Delinquencies May Be Short-Lived

Posted On: May 9, 2006

By Mike Killian, CardRatings.com Debt/Credit Management Reporter

The The American Bankers Association (ABA) recently reported that the percentage of credit card accounts 30 or more days past due slipped to 4.27 percent in the 4th quarter of 2005 (October-December). However, another recent article published on CardRatings.com, Trends in the Federal Report, suggests an increase of credit card balances from 2001-2004. These two statistics regarding credit card debt seem contradictory.

I hoped to connect or separate the two reports conclusively and I went to two different sources to do so. I was able to contact Kieth Leggett, Senior Economist at the ABA and Linda Sherry, Director of National Priorities at Consumer Action, a non-profit, membership-based organization that was founded in San Francisco in 1971.

I asked each if it was possible that the federal trend report was about to be altered by the ABA report. Both Keith and Linda indicated a minimum connection between the two reports. Both also offered some interesting perspectives regarding the issues.

Keith expanded on possible reasons for the fall in delinquencies:

“2005 offered a stronger economy and a more factorable climate to reduce delinquencies. Additionally many consumers converted credit card debt to equity debt which also lowered delinquencies. But also, the new bankruptcy law went into effect October 17, 2005 and many consumers declared bankruptcy early to avoid the more stringent law. Thus much of the debt which may have been delinquent was captured in an early bankruptcy thereby reducing the overall number of 4th quarter delinquencies.”

I also asked Keith and Linda whether recent federal guidelines by the Office of Currency Comptroller (OCC) to increase minimum credit card payments might have had any affect on this situation. Neither thought there was a direct correlation.

Keith offered a unique viewpoint:

“Most banking institutions had already incorporated OCC guidelines. In fact, all but two had done so prior to the end of year. Therefore, the increased minimum payment was already in affect in most cases and would have had minimum impact. However, because of the American Bankers rationale previously offered, ABA is anticipating delinquencies to again increase in 2006.”

Linda Sherry’s comments focused on future trends and were less than optimistic:

“Increasing minimum payment should yield less delinquency, not more. But I think we might see an increase in delinquency in the first half of 2006.

Delinquencies continue to hover around 5%. Our greatest concern is not so much delinquency, which is relatively constant. Our greatest concern is the increase in consumer debt.”

Linda, I could not have said that better myself! Rising debt should be a major concern of every consumer going forward. Statistics can be manipulated, but one thing we do know is that there is a direct correlation between rising debt and rising delinquencies.

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Mike Killian has been writing about credit and debt management issues that are of importance to consumers for over 8 years. His articles have been referenced by various members of the media, including MSNBC and The Motley Fool. Mike has also offered debt elimination seminars to businesses and community colleges for many years.

Mike offers free consumer advice on the CardRatings.com Credit Forum as well as on his own site, FreeMoneyTraining.com. While at his site, you can view additional articles as well as his schedule of upcoming seminars.

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