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Credit card companies haven't had the smoothest sailing the past few years, as economic hard times and massive write-offs have bitten into the industry's bottom line. Things have been looking up lately, though, as card issuers see consumers breaking out their cards more often -- and paying their bills in a timely fashion.
Improvements occur despite the slow economic recovery
Heavy hitters in the industry reported lower late payments in May than in April, and only Discover Financial Services (NYSE: DFS ) didn't see a decrease in its monthly charge-off rate. And despite a disappointing jobs report and a sloggy economic forecast, there is even evidence of a resurgence of credit card use among consumers. A recent study projects credit card use for everyday shopping to increase to 33% by 2017, compared with 29% in 2011.
This is good news for Discover and peers Capital One Financial (NYSE: COF ) , JPMorgan Chase (NYSE: JPM ) , Bank of America (NYSE: BAC ) , American Express, and Citigroup (NYSE: C ) . The improved outlook occurred even as issuers cut back on introductory mailings, tamped down promotions, and kept interest rates pretty steady. Issuers have been reducing mailings since December of last year, after a veritable blitz of direct marketing. Card companies issued more than 1 million new cards in that month, and they weren't choosy: Many of those were given to people with bad credit.
The reason for the tsunami of mail offers was that card companies insisted that they needed to pull in new customers after losing revenue because of new regulations. This push for new customers came not very long after issuers were forced to write down boatloads of uncollectable debt in 2010, as a result of -- you guessed it -- signing up consumers with poor credit, who are more likely to incur fees. Even so, issuers have been lucky so far, with some noting surprising improvements in timely payments and charge-offs since last year at this time.
Capital One Financial, which actively pursued customers who had recently emerged from bankruptcy, wrote off only 3.85% of total balances this past May, compared with 4.84% one year ago. Even though the monthly rate didn't budge, Discover saw its charge-off rate drop from 4.82% one year ago to 2.65% last month. This good fortune comes despite the fact that the credit card industry lent $12.5 billion last year to those with damaged credit.
Despite all those cards being handed out to customers with dicey credit histories, these companies are doing very well. The question is whether the issuers' good luck will hold. If subprime borrowers are still being solicited and card companies don't write off bad loans until they're six months past due, there could be a wave of charge-offs coming later in the year. Issuers insisted that they were being careful, only signing up customers who developed credit problems during the economic downturn, not those who were chronic credit risks. Have they learned their lesson? We should find out soon enough.
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