Credit Card Late Payments Hit Pre-Recesion Lows

The Associated Press reported last week that late payments and defaults on credit cards are falling to lows not seen since the beginning of the economic meltdown.

For accounts behind 30 days or more, American Express posted an annualized late payment rate of 1.6 percent of all its balances in May, which is a vast improvement from its rate from before the Great Recession. JPMorgan Chase reported a late payment rate of 2.66 percent; the last time its rate was so low was in the middle of 2006. Discover Financial Services came in third with a rate of 2.88 percent, their best since the beginning of the financial crisis.

Then there are defaults, also called charge-offs, which are accounts that are more than 180 days late. These get written off as uncollectible. For American Express, its default rate was again the lowest at 3.2 percent of balances, while Discover had a rate of 4.82 percent and Capital One saw its rate fall to 4.84 percent. And across the board, on an industry-wide average, default rates sank to 6.96 percent in the first quarter of 2011, down from the recession high of 11.46 percent in 2010′s second quarter.

So this data begs the question: Is this evidence that American consumers are putting their financial houses in order? The answer is ‘not necessarily.’ What these numbers do not reveal is that thousands of accounts have already been canceled during the recession due to default. Between 2009 and 2010, credit card-issuing banks wrote off more than $75 billion in unpaid debt. And because industry standards have been tightened since then, most of those whose accounts were canceled have probably not been able to obtain new credit cards.

So while the financial health of credit card holders does seem to be improving, these statistics do not reflect the American consumer population as a whole since it leaves out the rising segment of people with poor credit. And while unemployment and the housing market remain so shaky, it is not certain that group is headed in the same fiscal direction.