Gas Prices, Interest Rates Lead to Higher Credit Card Delinquencies
July 15 2006
After a two-quarter drop, credit card late payments increased to 4.40 percent at the beginning of 2006 from 4.27 percent (seasonally adjusted) in the previous quarter, according to the American Bankers Association’s Consumer Credit Delinquency Bulletin, a quarterly survey of more than 300 banks nationwide.
“Credit card loan payments are sensitive to financial pressures. What’s taking a bite out of consumers’ wallets? We think there’s a direct link between gas prices” and consumers’ ability to meet other obligations, ABA Chief Economist James Chessen said Tuesday. A decline in fourth-quarter credit card delinquencies tracked with lower gas prices. “But the favorable gas-price effect evaporated during the first quarter of 2006,” he says.
As the Federal Reserve raises interest rates, consumers with adjustable rates on their credit cards and home equity lines of credit face cost increases.
Chessen also points to the personal savings rate, which has been in negative territory for five quarters. “People are meeting their monthly obligations out of the little pot of money they have,” he suggests.
On the other hand, the economy is strong, there is job and income growth, and consumers’ financial wealth has grown with their investments over the past four to five years, Chessen says. “Overall, the financial picture is good [and] consumers’ balance sheets are still pretty good.”
This may be reflected in improved delinquencies in other consumer loan categories the ABA tracks. The composite ratio of delinquencies, which tracks late payments in eight types of closed-end installment loans, fell to 1.94 percent in the first quarter from 2.02 percent of accounts (seasonally adjusted) at the end of 2005.