Charge-Offs Hit Record High

Credit Card Charge-Offs at Record High

The U.S. monthly credit card charge-off rate continued to rise and hit another record high in May, for the sixth straight month, according to Moody's Investors Services (MCO).

The charge-off rate rose to 10.62% in May from 9.97% in April, and Moody's expects the rate to continue to rise in the coming months, though at a slower pace, and peak at around 12% in the second quarter of 2010.

Though the delinquencies (monthly payments more than 30 days late) fell to 5.97% in May from 6.34% in April, it was more due to a seasonal trend, as consumers used tax refunds to pay back their credit card debts, and the rating agency expects the delinquencies to resume their upward trend.

The pace of economic slowdown is now declining and the recession is expected to end later this year. But even after the recession ends, the recovery is likely to be anemic, and unemployment will continue to rise for some time. Credit card delinquencies usually follow the unemployment trend and are thus are expected to go up further from here.

Rising credit card losses mean more pain ahead for institutions like Bank of America (BAC), Citigroup (C), American Express (AXP) and Capital One (COF). For consumers, it means that the card companies will continue to slash limits (even for prime borrowers).

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