Rising credit card balances: A double-edged sword?

Sure, it signifies growing economic strength and confidence … but what about the downside?

WPRAccording 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.

Taking Stock of America’s “Most Damaged Brands”

Damaged BrandsIf you were to ask people to identify the brands that they view in negative terms, chances each one would readily name at least one.

The reasons why a brand loses its reputation can be varied: a botched product introduction … bad corporate leadership … a poor response to a crisis.

But the net effect is usually the same: The damage takes only a short time to occur, and it can take years for the brand to recover (if ever).

Which brands are viewed as the “most damaged” in the United States right now? Recently, the staff at equity analysis firm 24/7 Wall Street put their collective heads together and came up with a group of nine brands that they feel qualify for the dubious “top honors.” They are:

  • Apple
  • Best Buy
  • Blackberry/Research in Motion
  • Boeing
  • Groupon
  • Hyundai
  • JCPenney
  • J.P. Morgan Chase
  • Martha Stewart

I find this list pretty much spot on. Most of them would probably be on anyone’s list:

Best Buy logoBest Buy – Its big box stores function well as a place to “showroom” appliances and electronics for consumers … who then head home to purchase the same products online at lower prices.

Blackberry / Research in Motion logoBlackberry Speaking personally as an owner of a Blackberry smartphone, is there any brand whose products have been more disappointing to its loyal users than this one? I doubt it.

Boeing logoBoeing – The highly touted Dreamliner 787 passenger jet has been delayed for years. Many consumers appear to be nervous about the model’s design, and recent developments portend … more delays.

Groupon logoGroupon Groupon’s place in business history may be as the ultimate example of a dotcom-era “glorious failure.” Its business model, wherein merchants sign up for a scheme that’s guaranteed to lose them money, had to be “too bad to be true.”

JCPenney logoJCPenney I’ve blogged before about the predicament of this department store brand. In a stunning series of missteps, attempting to attract a completely different demographic of shopper while simultaneously dissing its loyal customer base turned out to be a sure recipe for damaging the Penneys brand – possibly irreparably. The odds are better than 50/50 that this store chain will now follow Montgomery Wards into retail oblivion.

Martha Stewart logoMartha Stewart Take an iconic business celebrity and send her to prison for insider trading. Meanwhile, her lifestyle media company is hammered by social media (Pinterest and all the rest), while television programming is splintering into more and more micro-segments thanks to the Internet and an explosion of new programming options for viewers. Is this brand even relevant anymore?

The remaining brands – Apple, Hyundai, J.P. Morgan – are ones that I feel have more inherent strengths and should be able to bounce back from recent setbacks.  Provided, of course, that they make all the right moves and avoid any new pitfalls.

What are your thoughts? Would you nominate any other “damaged” brands for inclusion on the 24/7 Wall Street list? (I thought of Sears for one …)  Feel free to share your thoughts here.