Credit-Card Debt Keeps Falling. Banks Are On Edge.
Americans are paying off their credit card debt at levels not seen in years. This is good news for everyone but credit card issuers.
Major card issuers, targeting borrowers ranging from the affluent to the subprime, say overall card balances – and therefore corporate interest income – are falling. To compensate for this, issuers are spending more on marketing and relaxing their underwriting standards.
Discover Financial Services DFS -0.60%
When he was asked to win last month, it was found that the percentage of card balances paid out at the end of the first quarter was at its highest level since 2000. Capital One Financial Corp. stated that nearly half of credit card balances at the beginning of March had been paid out by the end of the month, which the company said was historically high. The companies’ calculations are based on the credit card balances that they have packed into securities and sold to investors.
Synchrony Financial,
Payment rates were higher than the pre-pandemic average, according to the largest business credit card issuer in the United States.
The card balances of the three companies decreased by 9%, 17% and 7% respectively in the first quarter compared to the previous year.
The results reflect the upside-down effect of the pandemic on consumer finances. A year ago, lenders expected arrears to surge and many borrowers turned to credit cards to make ends meet. But then the government stepped in, issued stimulus checks, expanded unemployment benefits, and made it easy for borrowers to hold payments on many mortgages and student loans, and the expected increase in arrears did not materialize.
Even when Americans start to spend on their credit cards again, they keep paying off their card balances. This signals that many borrowers are doing well even during the pandemic. However, many card issuers rely on growing card usage and credit for their earnings, and are wondering whether the pandemic trends will shift over the long term.
“We are very focused on getting back to growing credit,” said Roger Hochschild, Discover Chief Executive. “Arrears can’t be much lower than they are now, but if your credit continues to shrink, your earnings will decrease [and] The margins will deteriorate. “
Some consumers have restricted their credit card usage because the things they normally spent money on, like traveling 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.
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Carolina Ixta Navarro-Gutiérrez had approximately $ 2,800 in credit card debt at the start of the pandemic and was making small payments on her Wells Fargo & Co. card. But then the government stopped paying on federal student loans, and they began redirecting the $ 500 it spent each month on those loans to repay their card instead.
Ms. Navarro-Gutiérrez, a 24-year-old elementary school teacher who lives in Berkeley, California, continues to use her card but now pays it out every month.
Equifax credit reporting agency Inc.
U.S. general-purpose and load-only credit card balances were $ 749 billion in March, a 2% decrease from February and a decrease of 14.5% year over year. Consumer credit card balances averaged 18% of their general-purpose credit card spending limits in March, compared to about 21% the previous year and the lowest level since Equifax began tracking this metric in 2009.
According to the Nilson Report, an industry publication, credit card spending in the U.S. was nearly $ 3.9 trillion for general-purpose and business cards last year, down 9% from 2019.
According to card issuers, spending is rising as the US emerges from the pandemic. Even so, people are still paying off their balances. At JPMorgan Chase & Co, total US dollar credit card purchases increased 3% year over year in the first quarter. However, the card balance fell by 14% over the same period.
Matthew Fraser says he paid off all of his credit card debt and stopped using credit cards during the pandemic.
Photo:
Matthew Fraser
Matthew Fraser said he was about $ 30,000 in credit card debt when the pandemic broke out and he was stuck on some of his cards.
Mr. Fraser then lost his part-time job in the guest service of a sports team. He had already moved back in with his parents and was using his economic checks and unemployment benefits to pay off his debts. In August, Mr. Fraser got a job in mortgage sales. In February he paid off all of his card debts.
“I said,” I need to get my finances in order so that if I lose my job I don’t have to rely on my parents, “said 30-year-old Fraser, who lives in the Atlanta area Child more. “
He now makes all of his purchases with a debit card.
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Card issuers are trying to attract new customers, especially those with good credit scores, who are likely to use the cards frequently and have funds on them. American Express Co.
Often aimed at wealthier customers, the company spent $ 1 billion on marketing expenses in the first quarter, up 21% year over year. The company’s card balance in the United States decreased 11% year over year in the first quarter.
According to Mintel Comperemedia, issuers sent an estimated 260 million credit card requests in March, up 23% from February and the highest since March 2020 when they stood at around 309 million. The number of open credit card accounts fell last year for the first time in at least seven years in a row, according to the Mercator Advisory Group, a payments research and advisory firm.
Capital One, which tightened its underwriting standards when the pandemic broke out, said it has gradually increased spending limits on credit cards over the past few months. On its call to win, Discover said it “has started to migrate [its] Credit standards back to pre-pandemic levels. “
MarketWatch’s Jillian Berman explores the financial and psychological baggage that debt brings with Leon LaBrecque of Sequoia Financial Group and Lauryn Williams, three-time Olympic gold medalist and founder of Worth Winning. Together, they’ll discuss strategies for paying off your student loan, credit card, and other debts – and using leverage to your advantage.
Write to Annamaria Andriotis at annamaria.andriotis@wsj.com