UK credit card performance holds steady in September

The overall performance of UK credit cards was steady in September, helped by the benign economic environment, Moody’s Investors Service said in its UK Credit Cards index.

Delinquencies improved during September, with the delinquency rate easing to 6.03% from 6.16% the previous month.

“We believe that this improvement was driven by a concerted effort by most credit card issuers to improve their servicing and underwriting procedures, coupled with a benign economic environment,” said Cher Chua, a Moody’s analyst and co-author of the report.

The charge-off rate showed some sign of improvement, falling to 6.50% in September 2007 from 6.88% a year earlier. Charge-off rates had increased dramatically after the changes to Individual Insolvency Agreement (IVA) rules in 2003 and 2004, but now are showing signs of settling to a more sustainable level.

Payment rates and gross yields experienced a small deterioration in September compared with the previous month. The payment rate decreased by 166 basis points month-on-month, although the decline can be attributed to the lower number of business days in September available for customers to make payments. Gross yields fell to 18.67%.

“The UK economy grew 0.7% quarter-on-quarter and 3.2% year-on-year in the third quarter of 2007, surprising to the upside,” said Nitesh Shah, a Moody’s Economist and report co-author. “However, the pace of growth is likely to have peaked. Although the outlook remains benign for the forthcoming quarters, the risks are more weighted to the downside.”

“Economic conditions are set to deteriorate over the forthcoming quarters as the increases in interest rates — both the base rate and LIBOR rates — feed into the economy while a softer financial market may result in a weaker employment environment,” Shah continued. “Additionally, a softer housing market may depress wealth perception and hence spending habits. The improvement in charge-offs and delinquencies may be halted prematurely if the economy weakens more than central expectations.”