Credit card industry executives likely breathed a sigh of relief today as American Express, Wall Street’s favorite pet, reported that write-offs on credit cards actually beat expectations for the later part of 2009. Write-offs, which are loans so overdue that they move past delinquency into pure, unavoidable losses for the company, were expected to be far greater since unemployment threatens to break into double digits and the economy has yet to rebound.
Bloomberg.com reported today that debt collection costs also fell, from 10 percent in May to 9.9 percent in June. Now that’s not a huge reduction, but it signals that the record charge-offs and delinquencies that have battered the credit card industry over the past 18 months might be letting up.
American Express wasn’t the only card company with a glimmer of hope in its filings. JP Morgan Chase and Discover Financial Services also reported fewer rotten loans that had to be sloughed off their balance sheets. That’s good news for credit card companies that have seen record losses since 2007.
With unemployment at a 9.5% in June, the highest in over two decades, you would assume that credit card delinquencies would rise as well. If consumers are losing their jobs and struggling with the most basic bills, then they might not be able to scrounge together money to make even their monthly minimum credit card payments. But the news from American Express and other issues suggests that we may have witnessed the worst charge-offs already.
Another factor may be President Barack Obama’s much-heralded credit card bill, which reins in certain billing practices and effectively prevents credit card companies from generously offering low-rate credit only to hike fees and interest rates later. Before the legislation takes effect next year, credit card companies have been combing through their existing customer base to weed out the riskiest borrowers. As part of this process, some issuers, in an effort to tidy up their books, have been more willing to settle outstanding debts with consumers, leading to better write-off results this quarter.
Just last year, it seemed as if American Express’s charge-offs woes would only increase. The percentage of loans considered absolutely uncollectible had shot up by 50% since just a year earlier. Rattled, American Express started tightening its lending standards and scaling back credit lines for customers deemed risky. That purge may have buoyed results this time around.