The last time consumer loan charge-off rates danced with 3% was in the 4th quarter of 2011. That’s about to change, and possibly in a much bigger way than we previously anticipated.

Every quarter, Recovery Decision Science predicts consumer charge-off rates for the coming four quarters. As you can see from the table below, we’re predicting the charge-off rate to hit 3% by the end of Q1 2018. This prediction is consistent with what we’ve been seeing over the past several quarters as charge-offs have been gradually creeping up. Let’s take a look at our latest predictions:

Table (1)


As a reference, RDS uses a proprietary Error Correction Model (ECR) to predict trends in the charge-off rates. Check out this previous post to learn more about ECR.

Over the past few years, the RDS model has been extremely accurate in predicting charge-off rates. However, as illustrated below, actual charge-off rates for the past two-quarters have surged well above our predictions:


This may be a sign of a new normal with regard to charge-off rates. We’ll continue to monitor these changes and adjust accordingly with our future predictions.