Credit card default rates show that recovery is slowing

sign with 'Save your Home' for loan modificationsA new study shows bank-issued credit card delinquency rates dropping, but the sluggish pace of improvement points to a still-struggling economy and an elusive recovery. According to the American Bankers Association's Consumer Credit Delinquency Bulletin for the second quarter, delinquencies on bank cards were 3.62%, an improvement over the previous quarter, when the rate was 3.88%.

While this is a marked improvement over last year, when bank card delinquency rates edged up to 5.0% in the second quarter, we're not out of the woods just yet. Keith Leggett, senior economist and vice president at the American Bankers Association, tells WalletPop this data shows that persistently high unemployment is acting as a brake on economic recovery.

"The economy is still struggling. We're not getting the rapid job creation most people hoped for. This has really created difficulties for people with regard to making their payments." Part of the reason delinquencies aren't rising at a greater rate, the ABA says, is because lending institutions are still writing off bad loans. Leggett adds, though, that consumers are taking steps to pay down their debts, a welcome piece of news.

In addition to the lower rate of missed card payments, delinquencies on auto loans dropped slightly when compared to last quarter. The delinquency rate on home equity loans also fell, although delinquencies on home equity lines of credit were flat. Loans on motor homes and boats, though, continue to default at increasing levels. This pattern of delinquencies shows that Americans still are being forced to pare back their spending to the bare essentials, Leggett says.

"What you're looking at are luxuries versus necessities," he says. Americans are asking themselves what they can afford to blow off, and if keeping the car loan up to date so they have a way to get to work means letting the RV loan lapse, so be it.

Leggett says when data comes out for the third quarter, it's likely to show more of the same: modest improvement, lingering hardship.

"The economy has lost momentum in the recent quarter. We've seen job losses in June, July and August, and that is going to affect the ability of consumers to make their payments," he says. As a result, says Leggett, delinquencies will continue to improve but at a slow pace, reflecting a stagnant economy rather than one that's rapidly getting better or worse. This situation is likely to remain until the employment picture brightens and Americans have more disposable income.
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