Credit card holders who in ordinary years might have used their tax refunds to pay down their balances apparently spent the money elsewhere as the recession deepened in the first quarter.
That's one of the conclusions that may be drawn from data showing the delinquency rate for bank-issued credit cards rose 11 percent in the first three months of the year, according to credit reporting agency TransUnion.
The delinquency rate jumped to 1.32 percent this year, from 1.19 percent in the first three months of 2008, TransUnion said. The statistic measures the percentage of card holders who are three months or more past due on their payments for cards bearing MasterCard and Visa logos, along with American Express and Discover cards.
The average total debt on bank cards also rose, jumping to $5,776 from $5,548 last year.
Balances typically rise in the first quarter, as holiday spending comes due, said Ezra Becker, director of consulting and strategy in TransUnion's financial services group. But retail sales results showed holiday spending took a steep drop. That likely means higher balances now reflect consumers using credit cards to pay for necessities, he said.
"You would have seen a much better retail season if people were spending on gifts," Becker noted.
While delinquency rates typically rise in the first quarter, this year's jump was higher, he said, in part because tax refunds were likely used to cover everyday expenses as the unemployment rate shot up.
Becker also noted that many workers who in past years received bonuses did not get that income, while others saw overtime wages slip. "A lot of the funding that would be available to pay down debt has either disappeared or was allocated to other uses," Becker said.
That said, the credit card delinquency rate remains well below the 5.22 percent for mortgages in the first quarter, meaning card holders are trying hard to keep their payments current, even when other debts go unpaid. "We see consumers really putting a lot of effort into trying to keep their credit card relationships at a healthy status," Becker said.
TransUnion measures credit card delinquencies at 90 days, but tracks mortgage delinquencies at 60 days. Becker said that is because card payments are typically much smaller than mortgage payments, and it's easier to catch up on past due cards. For people in financial distress, it's much harder to produce two mortgage payments once they fall behind, he explained.
Not surprisingly, bank card delinquency rates remained the highest in the states hardest hit by the mortgage meltdown: Nevada, Florida, Arizona and California.
North and South Dakota and Alaska, the states with the lowest rate of mortgage delinquencies, are also the states with the lowest credit card delinquencies, TransUnion data showed.
TransUnion, which samples 27 million consumer records to produce its data, expects the rate of credit card delinquencies to rise for the rest of the year, ultimately reaching about 1.7 percent.
Depending on the impact of economic stimulus programs and the effects of unemployment, TransUnion said the rate of increase could taper off early next year, but the peak is not likely to be reached until late 2010 or early 2011.
It's too early to tell how changes in credit card regulations and the responses by lenders to the new law will affect payment rates, Becker said.
Another unknown is what will happen when credit becomes more available. Becker said the number of new cards issued during the first quarter plunged 49 percent from last year. At the same time, there were also widespread moves by banks to cut available credit on existing cards in an effort to manage risk.
"There is a pent up demand for credit," Becker said. He expects some lenders will start issuing more cards as soon as statistics show the economy is recovering from the recession. And even if some banks cut the number of accounts they open, Becker said, "other lenders, we believe, will step into that vacuum."