Credit cards see more profits, less late payments

The top U.S. credit card companies are seeing a boost to their bottom lines as consumers are getting better about paying their bills on time.

Five of the top six card issuers on Friday said the rates at which their customers defaulted on their accounts fell in June. Bank of America Corp. reported the biggest drop in defaults, with JPMorgan Chase & Co. and Discover Financial Services also showing significant improvement.

Late payments were also down. Only Capital One Financial Corp. saw an uptick in payments late by 30 days or more, and that increase was tiny.

Among the top six, only Citibank had not yet submitted its monthly regulatory filing detailing card performance for the month. Its parent, Citigroup Inc., reported second-quarter results earlier in the day, however, giving some insight into its card performance.

The latest data followed reports that show credit card users have far better payment habits than a year ago, when the industrywide charge-off rate peaked at 10.9 percent, according to Federal Reserve data. For the first three months of this year, that rate was down to 6.96 percent — a significant improvement, but still well below the industry average of 3.82 percent before the recession, which indicates banks will benefit further as default and delinquency rates further improve.

And they should continue to do so. Banks have already written off the balances of most customers expected to default, and those individuals have a hard time getting new credit.

The impact of the improved payment habits was reflected in banks' second-quarter financial results this week.

Citigroup said that it pulled $757 million out of the pool set aside to cover uncollectable credit card bills, adding to its $3.3 billion profit for the quarter. That followed a report from JPMorgan Chase on Thursday, which posted a $5.4 billion profit for the period, boosted by a $1 billion reduction in loss reserves.

And much of Capital One's 50 percent profit leap reported Tuesday was due to the $579 million it released from reserves. Analyst Henry Coffey of Sterne Agee estimated 81 cents of the $1.97 per share profit, or about 41 percent, came from that reserve release.

Last month, Discover Financial Services said it released $401 million from its reserves, helping to more than triple the company's second-quarter profit.

Also goosing bank bottom lines: Card holders are using their credit cards more. That trend is now clear, after 51 percent of the U.S. card market has reported its second-quarter results, said Morgan Stanley analyst Glenn Fodor.

Citigroup said purchase volume rose 1.5 percent.

JPMorgan Chase's customers spent 10 percent more using their cards. Discover said sales volume on its namesake cards rose 9 percent.

Bank of America and American Express Co. are slated to report next week, and both are expected to show similar gains in spending.

The Federal Reserve said total balances on revolving credit, which is mostly cards, rose slightly in May to $793.13 billion. That's still nearly 19 percent below the peak balances of $973.64 billion in August 2008, but reflected an uptick in spending after months of belt-tightening by consumers.

What's less clear is if the higher spending will continue.

Borrowing is typically a sign of confidence in the economy, and the weak jobs market and higher unemployment last month may discourage further spending.

And even when the recovery gains steam, few economists say they expect consumers to pile on debt again after spending the last two years paying it down.