Credit card debt keeps dropping. The banks are on the alert.
Large card issuers that cater to borrowers ranging from the wealthy to the sub-prime say overall card balances – and therefore corporate interest income – are declining. To compensate, issuers are spending more on marketing and relaxing their underwriting standards.
Discover Financial Services said in its earnings call last month that the share of card balances redeemed at the end of the first quarter was the highest since 2000. Capital One Financial Corp. said nearly half of the credit card balances it had been paid off in early March through the end of the month, which the company called historically high. The companies’ calculations are based on the credit card balances they have packaged into securities and sold to investors.
Synchrony Financial, the largest in-store credit card issuer in the United States, said payment rates were higher than average before the pandemic.
The three companies’ card balances were down 9%, 17% and 7% in the first quarter from a year ago, respectively.
The results reflect the shattering effect of the pandemic on consumer finances. A year ago, lenders expected defaults to increase and many borrowers to turn to credit cards to make ends meet. But then the government stepped in, issuing stimulus checks, increasing unemployment benefits and allowing borrowers to easily suspend payments on many mortgages and student loans, and the expected rise in defaults did not happen. .
Now, even as Americans start spending again on their credit cards, they continue to pay off their card balances. This indicates that many borrowers are doing well even during the pandemic. But many card issuers rely on growing card usage and balances for their income, and they wonder if pandemic trends will turn into long-term change.
“We are very focused on returning lending growth,” said Discover Managing Director Roger Hochschild. “Bad debts can’t be much lower than they are now, but if your loans keep going down, your income goes down [and] margins will get worse. “
Some consumers have limited their credit card use because things they normally spend money on, like travel and dining out, weren’t an option last year. Others switched to debit cards because they didn’t want to take on new debt in an uncertain economy.
Carolina Ixta Navarro-Gutiérrez had credit card debt of around $ 2,800 at the start of the pandemic and was making small payments on her Wells Fargo & Co. card. But then the government suspended payments on student loans federal governments and started diverting the $ 500 she spent each month on these loans to pay off her card instead.
Ms Navarro-Gutiérrez, a 24-year-old elementary school teacher who lives in Berkeley, Calif., Continues to use her card but now pays it off monthly.
Credit reporting firm Equifax Inc. said U.S. credit card balances were $ 749 billion in March for general-purpose and in-store cards, down 2% from February and by 14.5% compared to the previous year. Consumers’ credit card balances averaged 18% of their spending limits on general purpose credit cards in March, down from about 21% a year earlier and the lowest level since Equifax began trading. follow this measure in 2009.
Credit card spending in the United States totaled nearly $ 3.9 trillion on general-purpose and store cards last year, down 9% from 2019, according to the Nilson Report, a publication of the sector.
Spending is increasing as the United States emerges from the pandemic, according to card issuers. Even so, people still pay their balances. At JPMorgan Chase & Co, the total dollar amount of credit card purchases in the first quarter increased 3% from the previous year. But card balances fell 14% over the same period.
Matthew Fraser said he had about $ 30,000 in credit card debt when the pandemic hit, and that he was behind on some of his cards.
Mr. Fraser then lost his part-time job in customer service for a sports team. He had already returned to live with his parents and used his stimulus checks and unemployment benefits to start paying down his debt. In August, Mr. Fraser got a job selling mortgage loans. In February, he said, he paid off all of his card debts.
“I said, ‘I have to get my finances in order and if I lose my job again… I can avoid having to fall back on my parents,” said Mr. Fraser, who is 30 years old and lives in the Atlanta area “I’m not a kid anymore. “
He now makes all his purchases with a debit card.
Card issuers try to recruit new customers, especially those with good credit scores who are likely to use the cards often and carry balances. American Express Co., which often caters to the wealthiest customers, said it spent $ 1 billion on marketing expenses in the first quarter, up 21% from the previous year. The company’s US card balances were down 11% in the first quarter from a year ago.
Issuers posted around 260 million credit card solicitations in March, up 23% from February and the highest since March 2020, when they totaled around 309 million, according to Mintel Comperemedia. The number of open credit card accounts fell for the first time last year after at least seven consecutive years of increases, according to Mercator Advisory Group, a payments research and advisory firm.
Capital One, which tightened its underwriting standards when the pandemic hit, said it had gradually increased credit card spending limits in recent months. Discover said in its results call that it had “started to migrate [its] credit standards to pre-pandemic levels. “
This story was posted from an agency feed with no text editing.
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