Credit Cards in the Economy: A Joyful Resurgence for the ARM Industry this Holiday Season and Beyond

December 4th, 2017

With Black Friday and cyber week concluding, and the winter shopping season progressing, credit card utilization should grow exponentially compared to the prior 10 months of 2017 – as is the case almost every year. As families and individuals confront tantalizing price markdowns for various goods and services, they’ll be more prone to utilize their credit cards to fund sizable lump sum expenditures to exploit the once-a-year discounts. This is further exaggerated by the nation’s continually increasing reliance on non-cash forms of payment for everyday expenditures. As such, Kaulkin Ginsberg Company’s (KGC) analyst team examined various credit card data as they relate to the economy. These observations, along with our continual research on trends within the financial services (i.e., commercial and investment banking institutions) and credit union industries, suggest that accounts receivable management (ARM) companies should anticipate that not only will credit card debt rise faster than in previous years, but delinquencies will grow more quickly as well.

To begin, let’s briefly highlight KGC’s findings from its market research initiatives on the financial services and credit union industries (which is readily available for free on KG Prime). Simply put, credit card net charge-offs grew substantially, with amounts totaling roughly $24.0 billion and $1.1 billion, respectively, between the two industries in 2016. Within the financial services industry, credit card net charge-offs grew by nearly 15% from $20.9 billion in 2015; whereas credit union credit card net charge-offs grew 19.5% from $937.8 million year-over-year. Since these two industries are the primary originators of credit card loans throughout the U.S., we can extrapolate these net charge-off increases to the overall industry. As such, it’s safe to assume that the U.S. credit card segment overall is experiencing increasing levels of bad debt, which should provide more lucrative collection opportunities for the ARM industry.

Looking more closely, KGC examined recent data from the Federal Reserve Bank of New York, which is illustrated in various figures below. The first figure, titled Credit Card Accounts: Net Extensions & Limit Changes, shows the net changes in the number of credit card account openings and closures, along with credit card limit changes. As we can see from the graph, there’s been significantly more credit card account openings than closures, accompanied by similar increases in credit limits on credit card accounts, since the Great Recession. Since 2012, specifically, these trends have shown to be even more considerable, suggesting that credit card lenders are increasingly more optimistic about the economy and borrowers’ ability to repay their debts.

However, this may not necessarily be true, as shown below in the graph titled Credit Card Transition into Severe Delinquency. This graphic reveals that although severely delinquent credit card balances (i.e., balances at least 90 days past due) have fallen considerably since the Great Recession’s peak, there’s been a significant spike over the last year. This recent spike may simply be a credit card-exclusive trend, as shown by the rates displayed in the graph, which reveal that new severely delinquent balances for credit cards are not only much higher than that of other major loan offerings (e.g., auto loans, mortgages, and student loans), but the spike is only apparent in the credit card metric; all other loan offerings maintain a relatively flat percentage of new severely delinquent balances. However, these data still pale in comparison to levels throughout the mid-2000s, suggesting that the U.S. credit card segment is still much safer than before the recession. Additionally, these considerations imply that credit card bad debt and delinquencies should continue rising into the future, as nationwide rates return to pre-recession norms.

The last figure, titled Credit Card Balances: Flow into Severe Delinquency, by Credit Score, reveals that not only are subprime borrowers (credit score less than 620) experiencing significant spikes in their severe delinquency transition rates, but more trustworthy borrowers are as well. Among these more trustworthy borrowers, specifically those with credit scores between 620 and 659, have become severely delinquent much more frequently over the past year or so, and even prime borrowers (credit scores between 720 and 759) have seen a minor increase in their transition rate. These two segments’ rates are obviously dwarfed by that of subprime borrowers, but increases in the three segments suggest that this may be a more widespread trend. However, we should anticipate prime borrowers’ transition rate to stagnate, since it’s already higher than pre-recession levels. This may be offset by continual increases in subprime borrowers’ transition rates.

To conclude, although these data may incite pessimism throughout the economy as a whole, ARM industry participants servicing the credit card segment should surely be excited about the prospects of increased delinquencies and bad debts. As 2017’s winter shopping season progresses, consumers should be overly optimistic about their abilities to assume significantly more debt based on various other economic measurements (e.g., greater consumer sentiment, lower unemployment rate, and greater wages). However, as the above data reveal, consumers are actually over-leveraging themselves in terms of credit card utilization. Therefore, we should see continual credit card bad debt spikes over the next couple of quarters, and growth more generally into the near future, which primes extremely well for the ARM industry.

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