NEW YORK — With more Americans filing for bankruptcy again after last year's hiatus, credit card default rates are spiking.
Though the percentage of payments being written off as uncollectable isn't as high as it was a couple years ago, the conditions are ripe for it to catch up. Bankruptcy filings keep pouring in, home prices continue to fall and energy prices remain high.
According to data from Moody's Investors Service, credit card companies wrote off 4.58 percent of payments between January and May, up nearly 30 percent from the same period in 2006.
"In 2007, we expected an increase, as bankruptcy filings returned to more normal levels," said Jay Eisbruck, managing director in Moody's Investors Service Asset-Backed Finance Group. He called this year's resurgence in bankruptcy filings the primary reason credit card default rates have soared.
In mid-2005, when home prices were still on the rise, the default rate was at around 6 percent, and in 2004, it was even higher. What ended up bringing the default rate down to about 3 percent in late 2005 and early 2006 were changes in U.S. law that made it more expensive and more difficult for individuals to file and qualify for bankruptcy. Bankruptcy filings surged in late 2005 before the law took hold, and then dropped off.
Now, bankruptcy filings are flooding back in. According to the Administrative Office of the U.S. Courts, the nation's bankruptcy filings jumped 66 percent in the first quarter. That's causing default rates to soar, because getting bankruptcy protection usually means you're released of your credit card obligations.
Part of the reason more people are filing for bankruptcy is falling home prices. Standard & Poor's reported Tuesday that U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since 1987, when it began its nationwide housing index. When home prices depreciate, it makes it harder for many homeowners to access cash through refinancing their mortgages. Some homeowners, especially those who got stuck with high rate loans, can't make their mortgage payments.
But the problem with bankruptcy filings in America — and in turn, the nation's credit card debt — is bigger than the slumping housing market, experts say.
"Bankruptcy filings have rebounded because consumers continue to feast on a diet of debt," said Greg McBride, senior financial analyst at Bankrate.com.
Rates for credit card delinquencies rather than defaults, meanwhile, have held up relatively well compared to other types of debt, especially when you consider that you don't lose anything physical, like a car or a house, if you're late in your payments.
According to the Moody's data, credit card delinquencies rose just under 4 percent between May 2006 and May 2007. Eisbruck said the bankruptcy law change affected the national default rate much more than the delinquency rate. People are usually delinquent before they file for bankruptcy; after they file, they are written off.
The credit card delinquency rate in the first quarter of 2007 was still higher than most other types of debt, according to data from the American Bankers Association. But they declined compared to the fourth quarter of 2006 while several other types of debt — home equity loans, property improvement loans, indirect auto loans and personal loans — saw delinquencies rise.
Typically, "credit card delinquencies run higher than other secured forms of debt. It's the first debt discharged in bankruptcy, and it's also the debt that consumers often stop paying first. They make the car payment because it's going to get them to work," McBride said.