It’s been a long and painful path, but most of us finally seem to be on top of credit card debt. But have we learned our collective lesson?

Credit card debt problems contained�

Two authoritative reports on card debt have been published in the last week, and both contained their share of cheerful reading. The first, from Fitch Ratings, show that “charge-off rates” (when credit card companies write off debts as noncollectable and pass them on to collection agencies) remain very low. In the third quarter, they averaged, for the top-seven card issuers, 4.53 percent which was down 363 basis points (bps) year over year. The other report, from TransUnion, showed that the number of delinquencies (when cardholders fall 90 days or more behind on their accounts) remains “near record low levels.”

…for now

However, both reports also contained somewhat muted warnings that there could be clouds on the horizon for consumers and credit card companies alike. TransUnion reported that the third quarter saw the first rise in delinquency rates for two years. And, of course, many delinquencies turn into charge-offs, so it’s no surprise that Fitch says: “…higher provision expenses [are] expected for 2012.” In other words, card issuers should set aside more money to cover bad debt next year.

Now, it’s true that neither of the reports is predicting serious problems anytime soon. But they contain enough worrying data to cause this blogger some issues.

Credit card offers going subprime

Perhaps the most worrying of all was a remark contained in TransUnion’s press release. Ezra Becker, who’s the company’s vice president of research and consulting in its financial services business unit, said:

We find card delinquency being driven by a number of factors. One such driver is the changing risk profile of consumers opening new credit card accounts. In the face of competition for prime consumers and the clear deleveraging efforts of those consumers, lenders have been gradually shifting their focus to the sub-prime market.

Yep, between July and September of this year, more than a quarter (25.2 percent) of all new cards issued went to subprime borrowers, according to TransUnion’s data. And that just a few short years after an almighty credit crunch created by lending irresponsibly to the subprime.

Credit card interest rates another problem

But it’s not just subprime borrowers who pose a threat. Dan Geller, an executive vice president with Market Rates Insight Inc., told PaymentsSource on Nov. 15:

Issuers are taking a bigger risk than in the past by stepping up promotions and tempting consumers with deals to spend more on their credit cards as we head into the holiday season with the hope that higher spending will lead to balance carry-over.

So issuers are using special credit card offers to tempt the prime and the subprime to take on debt. You can see why. Credit card interest rates are currently unusually high (16.75 percent APR, at the time of writing, according to IndexCreditCards.com), so having customers carry forward balances would boost interest income, one of the card sector’s most significant revenue streams.

Credit card debt to rise?

The latest Federal Reserve data on consumer credit suggest that, in September, revolving credit (which is nearly all credit card debt) fell by 1 percent. However, not everyone is convinced that the Fed’s figures accurately reflect reality. One who may wonder about that is Robert A. Dye, chief economist at Comerica. In a Nov. 15 email, he wrote:

Undaunted by flat-lined incomes, shoppers forged ahead in October driving retail sales up by 0.5 percent, after a strong 1.1 percent gain in September. The income constraint means that households are willing to add debt or reduce their saving rate in order to keep spending more. We saw both mechanisms in play in September and may well see the same when the October income and consumer credit data are published.

So what do you think? Have we learned our collective lesson? Or are we circling back to set off again on that long and painful path?

Published 11/16/11 (Modified 04/20/12)