Looming Indications Pertaining to the Dangers in Credit Card Borrowing

In the current economic climate, credit card delinquencies have become a significant concern for the financial industry. According to Brian Riley, Director of Credit at Javelin Strategy & Research, issuers face a substantial risk when card members are unable to pay their bills.

The number of accounts in the 90-plus-day delinquency segment, considered extremely risky and in danger of being charged off, has been on the rise. In 2022, 3 out of every 100 cardholder balances entered this critical delinquency status, and this trend is expected to continue. By 2025, more than 7 out of every 100 cardholder balances are expected to follow suit.

At 90 days delinquent, card companies must take action to alleviate the situation, or the account will become a charge-off. This directly impacts their operating income. At 180 days delinquent, issuers must take the loan off their books, further compounding the financial impact.

This trend is attributed to widespread financial strain causing more consumers to defer payments, as well as the ease of card payments that may encourage spending beyond means but still require full eventual repayment. Additionally, fraud risks are a contributing factor to cautious payment behavior.

Consumers are turning to credit cards for more purchases, which can be a concern for banks. This increase in credit card debt for cardholders increases the likelihood of default. In fact, 40% of accounts with FICO scores are less than prime, putting a significant number of credit card holders in a dangerously precarious financial position.

However, not all institutions are equally affected. Larger banks have a bigger account base, which allows them to spread their risk better. On the other hand, small banks are currently writing off closer to 10% of their credit card loans, a rate that could lead to industry consolidation.

Riley warns about the danger of consumers getting stuck in a loop of carrying credit card debt for extended periods. He emphasizes the importance of knowing one's customer beyond typical KYC programs.

The interest on credit cards is how card issuers make most of their money. However, the core of the lending calculation is a customer's ability to repay, which could be affected by inflation. Unemployment is another important metric to watch, as it can lead to increased charge-off rates.

Looking back at history, during the Great Recession, bankruptcy rates rose significantly. This serves as a reminder of the potential consequences of unchecked credit card debt. For the private-label credit card business, write-offs should ideally be around 6% to 7% to maintain a healthy balance.

Regulators losing their jobs and potential instability at Walmart could impact the lending landscape further. As the situation evolves, it's crucial for the financial industry to stay vigilant and proactive in managing credit card risks.