As Consumers Take On More Debt, Credit Card Losses Rise

As U.S. consumers become more comfortable with carrying higher levels of debt, the biggest credit card companies reported an increase in chargeoffs in their portfolios during the first quarter of 2017.

According to American Banker, the results suggest that the post-crisis era of exceptionally low losses in the credit card industry has ended.

During the last quarter of 2016, U.S. households had $12.58 trillion in total debt, an increase of 13 percent from the second quarter of 2013. Total household debt peaked at $12.68 trillion in the third quarter of 2008.

The six big credit card issuers — American Express, Bank of America, Capital One Financial, Citigroup, Discover Financial Services and JPMorgan Chase — comprise approximately 60 percent of total market share in the general-purpose card industry, and all reported an increase in chargeoffs.

Capital One experienced the biggest issue with problem debt, reporting a 5.14 percent net chargeoff rate in its U.S. card business — up from 4.16 percent in the first quarter of 2016. The company also made an upward revision to its credit card loss projections in 2017.

“Over the past year and a half, we have seen increasing competitive intensity, a growing supply of credit and rising consumer indebtedness,” Capital One CEO Richard Fairbank said Tuesday during a conference call with analysts. “Revolving credit grew at about 6.5 percent year over year, the seventh consecutive quarter it has grown much faster than household income.”

But while Discover saw its chargeoff rate rise to 2.84 percent in the first quarter, up from 2.34 percent one year earlier, CEO David Nelms said he is “very comfortable with where consumers are. They de-levered significantly after the crisis, and I think we’re now starting to see a little bit of a recovery off of an unusually low level.”

And JPMorgan Chief Financial Officer Marianne Lake reminded everyone during a conference call that “the credit card losses are still at absolutely very, very low levels.”

Experts point out that there are other factors contributing to higher losses in the industry, such as the fact that the card companies charged off a lot of bad loans during the financial crisis. In addition, companies reported accelerated loan growth in recent quarters, putting pressure on losses in the near term.

While it can be assumed that if U.S. unemployment rate rises considerably, credit card loss rates will most likely do the same; there is some hope. Legislative changes passed in 2009 prevent card issuers from raising interest rates on existing debt, which has made issuers careful about extending credit. This might help industry long-term loss rates remain lower than they were in past decades.