updated 10/25/2010 3:06:13 PM ET 2010-10-25T19:06:13

The rate at which banks wrote off credit card balances as uncollectable declined sharply in September to 8.9 percent, Moody's Investors Service said Monday.

Credit card charge-offs had increased in August to 10.03 percent, but the steep drop last month confirms the August increase was only due to seasonal factors, Moody's said.

The firm's charge-off rate index remains below its peak in August last year, despite stubbornly high unemployment. Moody's expects charge-offs will steadily decline into the first half of next year.

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"We are in part of the credit cycle where the historically strong correlation between the charge-off rate and the unemployment rate has weakened," said Moody's analyst Jeffrey Hibbs.

Credit card issuers have written off balances from borrowers with weak credit over the past couple of years, while at the same time tightening their underwriting standards. The borrowers who are left tend to have stronger credit and have been able to ride out the weak labor market.

In September, the delinquency rate fell to 4.65 percent, down more than a full percentage point below what it was in the same month last year. The rate measures the percentage of balances that are more than 30 days past due.

The sharp improvement in charge-offs boosted excess spread in September to 10.38 percent, an all-time high. Excess spread is a proxy for the profitability of a credit card program. It generally represents the yield of a trust, less expenses such as charge-offs, coupon and servicing, Moody's said.

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