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
This is good news for Discover and peers Capital One Financial
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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Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of JPMorgan Chase, Citigroup, and Bank of America. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.