Credit-card issuers catering to mainstream consumers are facing an increasingly tough year, as many loans approved during the post-pandemic rebound of spending and travel turn sour, and middle-market consumers continue to feel the effects of inflation, despite signs of an improving economy.
During the final quarter of the year, credit card charge-offs spiked sharply for riskier lenders including private-label card issuer
The pain is likely to intensify in the near term. The Federal Reserve Bank of New York said in a Tuesday report that serious credit card delinquencies increased across all age groups during the fourth quarter, "notably with younger borrowers surpassing pre-pandemic levels." Overall, credit card loans overdue at least 90 days jumped to 6.4% from 4% a year earlier.
Most card lenders said they expect write-offs to peak during the second half of this year, but a recent wave of corporate layoffs — partially offset by a positive January jobs-growth report from the Labor Department — has chilled the outlook for card loan growth this year. Discover Financial Services recently reported an
Card issuers also are bracing for a significant
"Most issuers will tighten credit and take other actions to offset both the late fees and rising delinquencies, but they will need to be very strategic to get through these headwinds," Kornfeld said.
Despite the recent slowdown in card portfolio loan growth, credit card issuers' total loan balances remain at historic highs due to strong post-pandemic spending, and the largest card issuers — which have a mix of upscale, mass-affluent and middle-income consumers — are well positioned to ride out challenges this year, according to Kornfeld.
Smaller banks and card issuers with a higher exposure to middle-income and lower-income consumers will be hardest hit, he said.
Renters at risk
"It's really a tale of two cities, or types of borrowers. Homeowners, which is about half of U.S. households, are in better shape because their house payments are locked in at lower rates, but renters are feeling a heavier pinch from inflation and higher living costs, and that's where credit problems are brewing," Kornfeld said.
Credit quality began to sharply diverge across different credit-card customer segments last year for a variety of reasons, said Pierre Buhler, managing director in the Financial Services practice of SSA & Company, a global management consulting firm advising on strategic execution.
The massive resurgence of travel spending that began in 2021 finally began to slow in the second half of last year, although issuers including Discover saw an
"Certain consumers built up a lot of cash during the pandemic, but many of them have burned through their money by now. And those with shaky jobs in this economy have suddenly become much riskier than they were a couple of years ago," he said.
Another lurking risk is the many card customers who are not prepared to resume student loan repayments, which is a hidden risk for credit card issuers, according to Buhler.
"I believe millions of people are expecting their student loans to be fully forgiven, and they may not get what they were expecting. This will also have a negative effect on credit this year," he said.
The continuation of the return-to-the-office movement for workers is creating additional credit risks for some borrowers.
"People who moved away from cities during the pandemic may be expected to come into the office now two or three days a week, and employers are not going to reimburse them for that travel," he said.
Although the Federal Reserve may cut interest rates this year if the inflation and unemployment outlook continues to improve, Buhler said consumers' finances won't recover quickly.
'A slow-moving tsunami'
"The persistent high interest rates we've already experienced will cause more consumers to fall into delinquency this year, in what will look like a slow-moving tsunami," Buhler predicted, adding that he expects to see the recent higher levels of charge-offs and delinquencies persist for several quarters to come, after an extended period of record-low defaults during the pandemic.
To cope with the relatively sudden change in credit quality, savvy issuers may draw upon troves of existing data and emerging AI tools to market credit cards to different segments of consumers, but issuers who treat customers monolithically will be more likely to lose profits, he said.
"The key to survival in this complex economic environment will be going after each customer segment with a different, appropriate strategy based on their risks and needs," Buhler said.
The largest card issuers including
"What some analysts miss is that when receivables proliferate, risks in credit quality are often hidden in the velocity of fast loan growth," Riley said, noting that because delinquencies and charge-offs lag several months behind booked loans, bigger losses than expected can pile up suddenly after a rapid loan-growth phase like the last year.
Riley also predicts that negative fallout from the post-pandemic card spending surge will drag on beyond 2024. "There will be a long tail on this event," Riley said.
In addition to tightening credit-underwriting rules, Bread said it's cutting some users' credit lines, a strategy one analyst believes will be used selectively to get through the next year.
"Financial institutions should monitor open lines of credit very carefully, especially sudden high spending on inactive credit card accounts, late payments, credit report changes" and other signs of consumer financial stress, said David Shipper, a strategic advisor with Datos Insights, who expects to see a pull-back on credit card offers in the next six to 12 months.
"Revenue growth can still occur by managing and nurturing existing credit card accounts. The last big spike in losses was 2008, and banks responded by increasing interest rates, lowering credit limits, increasing minimum payments or closing accounts altogether," he said, noting that currently, card industry delinquencies and losses are nowhere near 2008 levels.
Looking ahead, credit card issuers have strong receivables and manageable risks, as long as there are no hairpin economic shocks, but consumer credit-card loan growth will be very low this year, at 1% to 2%, Moody's Kornfeld said.
"We're headed for a soft landing with the economy, but most banks will need to be conservative with their underwriting until we get through this cycle and see how things play out," he said.
