Sure, it signifies growing economic strength and confidence … but what about the downside?
According to the latest estimates, U.S. credit card balances are expected to hit $1 trillion by the end of 2016.
It’s a milestone of sorts. After all, the last time Americans’ total credit card balances exceeded $1 trillion was in 2008, just before the onset of the “Great Recession” as the housing/financial crisis intensified.
Does this new peak herald the end of the frugal consumer spending habits which transpired in the wake of the recession?
Perhaps so … but a good deal of the explanation reflects on the financial institutions themselves, who began opening the spigot by relaxing restrictions on signing up subprime consumers.
They’ve also begun raising credit limit amounts.
All this is a change from before, when credit-tightening was the name of the game from 2009 onwards.
Part of what’s driving the new policies is the fact that credit cards represent one of the few bright spots in consumer finance at the moment.
To illustrate the point, large credit-card issuer Capital One reports a year-over-year gain of nearly 15% in the 1st quarter of 2016 compared to a year earlier. Other major issuers — Citigroup, J.P. Morgan Chase and Discover Financial Services among them — also have experienced significant gains.
By contrast, other consumer lending activities are far less lucrative, because low interest rates make margins on traditional lending very low.
I wonder if the rush to ply subprime borrowers with new general-purpose credit cards is a smart long-term proposition, however. Nearly 11 million such cards were issued in 2015. That’s ~25% higher than in 2014 and the highest number of such cards issued annually since 2007.
Couldn’t the next bout of economic turbulence put us right back into a bevy of defaults as before? And aren’t we seeing hints of this already?
Here’s a clue: defaults rates appear to be rising along with the issuing activity — including a steady uptick in each of the first four months of this year.
And let’s not forget automobile loans, either. They’re up significantly as well — along with delinquency rates.
I think history can help guide us here — and with a lot more caution than was the case back in those halcyon days of 2007. If there are problems, no one can say that we weren’t forewarned, based on recent history.
What are your thoughts? Please share them for the benefit of other readers.
Nones Notes 
My son’s young friend is trying to qualify for a loan based on being able to earn 8-10 hrs per week in overtime pay. While he has been able to get this regular overtime for the past six months, he will have a loan that he’ll be struggling with or be unable to pay when that extra income dries up.
Less than two years ago, he was wondering if he would be part of his company’s layoffs. How quickly we forget that feeling of uncertainty when we make decisions to saddle ourselves with debt.
In 1981, something happened that many people have forgotten, or perhaps never knew: the governor of South Dakota approached Citibank (or Chase?) with a proposition. “You move your credit card operations (several hundred jobs) to Sioux Falls, and I’ll get the state legislature to repeal the state’s usury laws” (i.e., you can charge whatever interest rates you want on your cards).
This was a game-changer. Before that, an APR upward of 15% over prime on a loan would have been considered loan-sharking. Previously, credit card lending was risky business; interest rates were low as mandated by law and collateral on cards was, of course, nonexistent (unlike the usual requirements for a 90-day note or mortgage). Consequently, most banks reserved a “BankAmericard” for their best customers, and credit limits were more likely in the hundreds, not thousands of dollars.
Suddenly, with legal sky-high interest rates on balances, banks could afford to absorb some substantial losses and still make a killing.
It was off to the races. Soon, people’s mailboxes started filling up with solicitations that read, “You’ve been PRE-APPROVED for a Visa card with a $10,000 limit!” People’s eyes ran out on stems. Predictably, they didn’t read the small print. They just said, “Where do I sign?”
Other credit card companies followed suit. Other states repealed their usury laws, as well. The economy took off like a rocket as people filled their wallets with several cards and spent money on whatever they wanted. Wages didn’t rise, but borrowing exploded — and so did economic activity.
President Reagan got the credit. But of course, all that consumer debt proved ultimately unsustainable. Today we’ve got extremely sluggish growth and a Fed funds rate near zero.
Now comes this news that credit card debt once again is approaching $1 trillion. And that doesn’t include massive student debt that wasn’t on the books a few decades ago. With far fewer bolts in the quiver, I’d hate to be a Fed governor when the next economic shock comes down the track.