Credit card charge-off rates rise slightly at end of '07

In yet another sign of how much consumers may be struggling to pay their credit card bills and going deeper into debt, charge-off rates for credit cards rose slightly at the end of 2007.

According to the U.S. Federal Reserve, the credit card charge-off rate for commercial banks nationwide rose to 4.13 percent in the fourth quarter of 2007 -- up from 4 percent the previous quarter. Charge-offs are the value of uncollected credit card balances removed from the books and charged against a bank's loss reserves. The rate is the amount of charge-offs divided by the average outstanding credit card balances owed to the issuer.

Graph: Credit card loan charge-off rates for all commercial banks, 2002-2007

Source: Federal Reserve Board 

Credit card debt must be written off by banks after 180 days, but some credit card issuers may charge off the debt sooner. Charge-off rates have fluctuated over the last several years -- rising and falling based on economic conditions and outstanding credit. Although the charge-off rates are creeping upward, they are nowhere near 2002 levels. That year, the rates hit 7.67 percent in the first quarter and 6.07 percent during the second quarter.

As 2007 closed, losses for some individual credit card issuers were greater than the national average. According to First Annapolis Consulting, major issuers reported the following Q4 rates:

Capital One: 5.40 percent

WAMU: 6.90 percent

Amex: 4.3 percent

Citi: 5.11 percent

Bank of America: 5.08 percent

Chase: 3.89 percent

Discover: 4.08 percent

Why you should care
Credit card losses drive up the cost of credit -- the interest rates charged on your Visa or MasterCard. We've already heard complaints from consumers about their credit card rates spiking, some for no apparent reason. Although a number of factors are at play when credit card rates go up (including profit maintenance to satisfy stockholders), charge-offs are a key element.

Credit card charge offs are typically sold to debt buyers for pennies on the dollar of the original debt. The debt collectors then contact consumers who owe the money to collect the full amount. Take a look at our debt collection series for an insight on increased collection activity in recent months.

See related: "Card issuers' bad earnings reshape credit card offers"