Delinquency drops a good sign for the economy

Over the past several months, consumers made a more concerted effort to pay off their credit card debt with greater regularity, and now experts say that this trend is likely to continue.

According to a reportfrom consumer economic news website The Street, the latest improvements in both delinquency – credit card balances that have gone unpaid for 30 days or more – and charge offs – accounts that have gone unpaid so long that lenders simply accept they will never be paid again – bodes well for the economy not only now, but in the future as well.

The report said that the average lender had an annualized charge off rate of 8.1 percent in July, and the number was only that high because of Bank of America’s 11.39 percent rate. Most other lenders saw rates well under 8 percent, according to numbers provided by SNL Financial. The average rate for the same month last year was 9.69 percent.

Similarly, delinquency rates dropped to 4.64 percent for the first month of the year’s third quarter, down from the 5.39 percent seen for the same period in 2009. The report said this is the lowest such level seen since SNL Financial started following these figures in January 2009.

According to experts quoted in the report, this trend is likely to continue. Richard Bove, an analyst at Rochdale Securities, said that lenders have seen improvements in both categories for a number of reasons, though how much can be directly attributed to them isn’t clear. Consumers have made a greater effort to pay down their debt, perhaps thanks to the provisions of the Credit Card Accountability, Responsibility and Disclosure Act. However, lenders have also tried to shut out the riskiest borrowers from having access to lines of credit.

Mark Tepper, president of Strategic Wealth Management, told The Street that the loss and delinquency rates are "bound to continue" making improvements, because consumers are pouring more of their discretionary income into paying off their credit card debt. He also warned that this change in behavior would likely cost retailers and restaurants.

However, several retailers reported more profits despite lower total sales in the second quarter, largely because consumers spent more on their store-issued credit cards than they have in the past.