Credit card delinquencies fall -- sort of

Given Americans' love of credit cards, you may have been surprised by the recent headline declaring "Credit card delinquencies fall to four-year low." It's an even bigger surprise for those who recall reading the opposite headline just a year ago, when credit card delinquencies were declared to be at record highs.

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There's a reason for these rapid swings, but they have more to do with the policies of credit card companies than the behavior of consumers.

Delinquencies can be expected to rise in economic recessions and decline as the economy recovers, but the economy hasn't changed much since a year ago. Job growth remains weak and the economy plods along at an inconsistent pace.

Delinquency is generally defined as an account more than 30 days past due. This means that the cardholder in question has not made a payment -- even a minimum payment -- for more than 30 days since the last payment was due. In other words, it has been approximately two months since the cardholder last made a payment. Even as consumer debt burdens continue to climb and interest rates have begun to rise, the burden of making a monthly credit card payment remains very modest relative to other forms of debt. Many credit cards accept just 2 percent of the outstanding balance as a minimum required monthly payment. For a $6,000 credit card balance, the required minimum payment is just $120. This isn't chump change, but it is a fraction of what households are paying each month for other less flexible debts, such as mortgages and car loans, where the required monthly payments are higher and often not subject to negotiation.

Given the flexibility cardholders have in determining how much of a monthly payment to make on their credit cards, it should come as no surprise that the delinquency rates tend to show little fluctuation over time. Consumers can ramp up their payments in good times, and cut back when times are lean, all the while staying out of delinquency.

A year ago, the Moody's Investors Service Credit Card Index reports the delinquency rate as 5.12 percent of outstanding balances. After declining 11 consecutive months, the delinquency rate now stands at 4.37 percent.

The effective risk management policies of credit card issuers deserves some, well, credit for keeping delinquency rates confined within a rather narrow range. While those fluctuations take on a much bigger significance from a total dollar perspective when you're looking at $400 billion of credit card receivables, as Moody does, the fluctuations continue to be relatively minor.

When delinquencies are on the rise in times of economic recession, issuers are quick to cut the credit limits of the offending card holders, restricting the ability of delinquent cardholders to continue racking up more balances. This limits the impact on delinquency rates as delinquency is measured as the percentage of total dollars outstanding. Limiting the amount that delinquent cardholders can have outstanding keeps a lid on the overall delinquency rates. The converse if often true, as well. When the economy is recovering, even at the uneven pace seen over the past year, card issuers are quick to reward cardholders that have a demonstrated ability to pay on time by increasing their credit limits.

In other words, it's tougher to fall into delinquency when the card company is getting more liberal with its lending policies. To the extent that cardholders use these higher credit limits for additional purchases, but continue to pay on time, the overall delinquency rate as a percentage of receivables outstanding falls.

While a four-year low in credit card delinquencies may paint the picture that all is just swell with consumers and their debt burdens, take the headlines trumpeting these huge swings in consumer delinquency rates with a huge grain of salt. We weren't as bad off then as the headlines indicated then, and we're not as well off now.