This past year, the four largest retail banks in the U.S. dealt with credit cards delinquencies of almost 20 percent. Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup had a combined total loss of $12.5 billion from delinquent credit cards alone. This figure is $2 billion higher than it was in 2016.
According to Charles Peabody, the managing director at the investment group Compass Point, this is because many Americans rely on credit cards to get by in between paychecks. “There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden,” Peabody added.
In spite of these increasing losses, banks continue to try to bring in new customers by offering added incentives and rewards. This is because even with the losses, credit cards are still very profitable for banks. The average retail banking transaction nets a return of nearly one and a half percent whereas credit cards offer a return of nearly four percent.
Banks can charge high-interest rates and extra fees to customers who have trouble keeping up with their monthly payments. And they can charge fees to vendors for each transaction that is processed.
But there has been a growing concern about banks that are willing to continue to lend to customers with poor credit scores. And additionally, many experts have voiced concerns about what these growing levels of debt indicate about the financial middle class.
These delinquency rates are still lower than the levels reached during the 2008 financial crisis. But according to Andrew Haughwout, senior vice president at the New York Federal Reserve, “A noticeable rise in delinquency rates…is worth paying attention to.” Haughwout added that consumers with low credit scores are increasingly being offered credit cards and allowed to borrow more money.
And according to Mercator Advisory Group, a company that provides research and assessments for the banking industry, the number of open credit cards is expected to hit 488 million this year; this is an increase of 108 million since 2010. According to Brian Riley, director of the Mercator Advisory Group, this is due to the fact that “banks are putting weaker credits on the books.”
And it doesn’t appear that the banks plan to tighten their lending standards anytime soon. For example, JPMorgan increased its reserve for future credit card losses to $200 million in the fourth quarter.
But according to JPMorgan CFO Marianne Lake, rather than showing signs of deterioration, this trend is simply a “seasoning and maturation of the newer vintages, and growth.”
Author: Mike Brown
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