Credit card

How would credit card issuers react to a recession?

An economic hurricane is coming, according to Jamie Dimon, CEO of JPMorgan Chase. In fact, nearly all US CEOs (98%) recently surveyed by the Conference Board say they are preparing for a recession in the next 12 to 18 months.

Our latest Bankrate survey of leading economists posed the question slightly differently. Panelists estimate that there is about a two in three chance of a recession in the next 12 to 18 months.

As austere as all of this sounds, we received some positive news when the third quarter GDP reading rose 2.6% from the previous quarter, breaking a streak of two consecutive small declines to start the year. This has calmed the debate over whether or not we are already in a recession (which already seemed doubtful given that the unemployment rate is currently at the lowest level in half a century and consumer spending has been robust ).

Nevertheless, as Dimon said, storm clouds are gathering. It is widely accepted that a recession is likely in 2023 or early 2024. Many observers believe that a recession is the only logical outcome of the Federal Reserve’s quest to bring down the highest inflation rates in 40 years with an aggressive series of interest rate hikes.

What this means for credit card users

The average credit card rate has gone from 16.30% at the start of the year to 18.73% currently. This is the highest since February 1992. The average will certainly soon exceed the all-time high of 19.00%. Worse still for anyone carrying a balance, these increases have happened at an unusually rapid rate.

If you have no credit card debt, these rate increases will not affect your credit card bill. In other words, if you pay in full at the end of your billing cycle each month, your bill will not include interest payments. So an increase in TAP will not affect you.

But if you’re one of many with a credit card balance month over month, these rate hikes can significantly increase your debt load.

Let’s say you owe $5,000 in credit card debt.

  • If you make minimum payments at 16.30%, you will be in debt for 185 months and end up paying a total of $5,517 in interest.
  • At 18.73%, these minimum payments will keep you in debt for 190 months, and you will have to $6,422 in interest ($905 and 16% more than the old scenario).

Credit card balances are also setting records. Equifax says the total card balance is $916 billion, a 23% increase since April 2021.

Higher rates, higher balances and inflation are a bad combination. Credit card debt was already a persistent problem for many households and the situation is getting worse. Our sister site found that 60% of credit card debtors have been in debt for at least a year, up from 50% a year ago.

The silver lining so far

Delinquencies and payment defaults on credit cards remained very low. According to the Federal Reserve, only 1.81% of credit card balances were overdue for 30 days or more in the second quarter of 2022. ) weighed only 1.97%. Delinquencies and defaults have increased a little in recent months, but they are still well below historical norms. For comparison, these figures were 2.63 and 3.65% respectively in the fourth quarter of 2019.

In fact, normalization is a word that has come up time and time again in recent bank earnings calls. The prevailing financial industry view, at least for now, is that chargebacks and defaults will continue to rise slowly, but not to alarming levels. The sentiment seems to be that these stats were artificially low in 2020 and 2021 as many consumers paid off debt with their stimulus payments and spent less due to pandemic concerns.

This year, the credit card industry got to have its cake and eat it too. Consumer spending has skyrocketed as COVID-19 receded, but nearly all customers are paying their bills on time. Still, storm clouds are gathering.

Credit card issuers are building up their reserves to guard against possible credit losses in the future. And while they’re not tightening their lending standards on a large scale, they’re not easing them either. The Fed’s Senior Loan Officer Survey found that 95.7% of credit card issuers kept approval standards more or less unchanged over the past quarter. Right now, cautious optimism is mixed with emergency preparedness.

How bad will the economy get?

Fortunately, there is a good chance that the next recession will be moderate, at least compared to the two previous ones. During his company’s October 25 earnings call, Discover’s chief financial officer John Greene described a “more optimistic” scenario in which the unemployment rate rises only slightly from 3.5% at around 4%. He also referred to “a grim scenario” that would push the rate “north of 6%”. By comparison, the unemployment rate hit double digits in 2009 and 2020.

Let’s be clear: recessions are never fun and more than four million Americans would likely lose their jobs if the unemployment rate were to hit 6%. We don’t want that to happen, nor would we minimize the pain associated with it. But it’s also important to note that a recession doesn’t necessarily mean a full-blown crisis akin to the Great Recession of 2007-09 or the COVID-19 pandemic that began in early 2020.

The financial system is currently stable. Much tighter regulations were imposed after the financial crisis and all major banks are well capitalized. The next recession could manifest itself more in a slowdown in corporate earnings and less in a Main Street panic.

For now, credit card issuers are mostly staying the course

There weren’t as many noteworthy credit card launches or refreshes this year as there were last, but creations are still at an all-time high. Through July, Equifax says they were up 17.2% from last year’s record pace. The average credit limit for a newly issued credit card is $4,955. That’s a 20% jump from $4,131 last year. It is, however, still down from the 2019 average ($5,284).

About one in five of new cards (20.5%) opened this year went to someone with a subprime credit score. Although this marks a slight drop from last year’s 22.3%, lenders continued to show considerable appetite for new customers with less than perfect credit. In 2019, 20.0% of new credit cards went to subprime consumers.

This year, competition has been particularly intense between balance transfer cards, with Bank of America joining Wells Fargo and Citi in offering 0% balance transfer promotions that last up to 21 months.

The travel and cash back spaces have certainly not been forgotten either. The Chase Sapphire Reserve®, which is one of the most popular travel cards, recently increased its welcome bonus to the highest level since 2016. And the Citi® Double Cash Card, a favorite among cash lovers back, offers an introductory bonus to all new cardholders for the first time (previously the bonus was only granted to selected and targeted people).

Capital One CEO Richard Fairbank summed it up nicely on his last earnings call: “Generally, competition in the card business continues to be high, but largely stable and rational over the past few quarters. .”

The bottom line

If and when the economy deteriorates, it makes sense to expect the first cuts to target low-income, low-credit people. They are riskier borrowers, so that makes sense. These people may find it more difficult to access credit.

We would also likely see the card companies reduce their marketing spend, including sign-up bonuses, but the K-shaped economy is such that these deals are unlikely to stop. Barring a generalized crisis, the demand for new customers who spend a lot of money and pay their bills on time should be sufficient.

The credit card industry currently has a lot of momentum. The continued rise of e-commerce and declining liquidity are tailwinds. This is especially true when you factor in the release of pent-up demand for travel, dining, and other experiences as COVID-19 has evolved. High consumer spending and low delinquencies may not last forever, but I’m still optimistic about the credit card industry’s short- and long-term future.

Have a question about credit cards? Email me at [email protected] and I’d be happy to help.