As Cardholders Keep Paying on Time, New Normal May Be Emerging

U.S. credit card customers have become so diligent in making their payments that some are beginning to question whether the industry has entered a prolonged era of low chargeoffs and low delinquencies.

The conventional wisdom is that the trend will recede as the economy improves, consumers take on more debt and card issuers make more credit available to marginal borrowers. But high payment rates persist, leading some to wonder whether the changes will endure.

"Look, there's definitely a new normal out there," Discover Financial Services chief financial officer Mark Graf said this week at an investor conference. "Does it last for this cycle, and you ultimately revert to mean, because competition finds a way? Or is it a permanent situation? I think that's the debate you can have."

The six major credit card issuers — American Express (AXP), Bank of America (BAC), Citigroup (NYSE: C), Discover (DFS), JPMorgan Chase (JPM) and Wells Fargo (WFC) — report each month on the percentage of their card balances that are 30 to 60 days overdue. In April, each of the six companies reported its lowest early-stage delinquency rate in several years, according to a recent American Banker analysis.

Industry-wide charge-off rates are also at historically low levels, though they inched up in April at four of the six companies.

Discover, based in Riverwoods, Ill., announced recently that its net principal chargeoffs for 2012 were $45 million lower than in the previous year, due to a decline in delinquencies and bankruptcies.

At this week's Barclays' investor conference in London, Discover CFO Graf suggested that the trend might endure because of the 2009 law known as the CARD Act. The law limits the ability of card issuers to hike up rates on customers' existing debt; it also discourages issuers from using deceptive introductory promotions and rates that could increase the likelihood of late payment.

"It has brought a lot of discipline into the business … so we don't see folks competing on the basis of doing dumb things with respect to credit or pricing," Graf said.

Graf pointed to one other shorter-term factor that has contributed to lower loss rates — the fact that during the financial crisis, card issuers took losses quickly on loans that would likely have gone bad over several years. "So you took the normal supply of problem credit and worked it through the system quickly," he noted.

Following years of high volatility, the strong consumer credit profile has been generally welcomed by card issuers, but not all are convinced the trend is permanent.

Speaking at the same investor conference Wednesday, Capital One Financial's chief financial officer, Gary Perlin, framed the credit trend as being connected to the current economic cycle.

"I think as long as the macro environment provides a backdrop of uncertainty," he said, "it appears that both consumers and corporate customers are positioning themselves to continue…to be defensive."