Chargeoffs a serious part of credit card defaults

10.04.09
By Lewis Greene

One reality of credit card debt for consumers is that even if a lender gives up on collecting a balance, people are still on the hook for the loan.

This is illustrated in a recent announcement from Fitch Ratings showing that the chargeoff rate had hit a record high for the fifth time in the past six months.

A chargeoff occurs when a balance is 180 days or more overdue. Even though a lender may have technically given up on expecting the balance to be repaid, the chargeoff will damage a borrower's credit score for up to seven years and will most likely end up with a collection agency, where lawsuits and other steps can be taken to try to obtain payment.

According to Fitch, the chargeoff rate is 75 percent higher than it was a year ago and now stands at 11.52 percent of accounts, an increase of 97 basis points. Last month's report was the only time in six months that an improvement was seen in this area.

"Overall stress on consumers remains high and employment trends are still weak. As a result, chargeoffs will remain elevated until we see improvement in the unemployment rate and more meaningful declines in delinquencies," said Michael Dean of Fitch.

While chargeoffs continued to test new highs, Fitch noted that other credit card statistics were improving somewhat. For example, the number of accounts more than 60 days past due went down somewhat to 4.06 percent, from 4.45 percent the month before.

The credit rating agency also noted that card accounts more than 30 days overdue had not improved, and continued to hover around 5.5 percent.

The figures are unlikely to improve in the short term, with the American Bankruptcy Institute reporting this week that 1 million people have filed for bankruptcy so far this year.

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Credit card chargeoffs are bad news for lenders as well as consumers.