Why Reduced Credit Card Delinquency Is Bad News

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New data from the American Bankers Association shows that the rates of late payments for most categories of consumer loans are creeping up. In the aggregate, nine of 11 different loan categories showed increases in nonpayment rates. One significant outlier: credit cards, where the rate of 30-day-late or delinquent payments dropped a small amount, from 3.4 percent to 3.2 percent. Experts say that’s very bad news. Want to know why? “One new trend is that people are paying their credit card payments on time each month, even if that means missing their mortgage payment,” Mechel Glass, director of education for credit counseling organization CredAbility, says via email. “Some people utilize those credit cards to pay daily expenses that should fit within their budget, but it doesn’t due to a variety of reasons such as reduce income or underemployment.”

What’s more, if a financially struggling person lets one credit card lapse, that can cause other lenders to reevaluate their riskiness and possibly cut credit limits on other cards.

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Mark Hoewing, director of communications for InCharge Debt Solutions, a nonprofit credit counseling agency, agrees. “We all have seen this. Unemployment is high and there’s no equity in homes people can borrow. The choice they’re left with is putting food on the table and gas in the car, or paying the mortgage.” In a lot of cases, he says, the more immediate need wins out.

CredAbility’s Glass adds that once people get behind on their mortgage, they think they’re too far behind to catch up. A monthly mortgage payment can be hundreds or thousands of dollars and quickly mushroom into an overwhelming debt, especially when late fees and penalties are tacked on. By contrast, the monthly minimum due on a credit card seems more manageable, even though using credit cards to fund basic living expenses is an unsustainable solution.

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According to ABA data, delinquencies rose in the third quarter of 2011 for the following categories: personal loans, direct and indirect auto loans, boat and RV loans, home equity loans and lines of credit, property improvement loans and non-card revolving loans. Aside from credit cards, the only category in which delinquencies improved was in mobile home loans.

InCharge’s Hoewing says another reason behind the improvement in credit card delinquency could be tied to a deflated level of retail spending. If people are charging fewer discretionary purchases on their credit cards, they’re more likely to be able to make the minimum payments each month and keep their accounts in good standing.