Credit Card Delinquencies are Surging at Their Swiftest Rate Since the Great Financial Crisis.

Credit Card Delinquencies are Surging at Their Swiftest Rate Since the Great Financial Crisis According to Goldmine Six, credit card companies have been increasing losses at the fastest pace in nearly 30 years, despite being out of the Great Financial Crisis. Credit card losses decreased in September 2021, and although the initial increase may have been temporary, they have been rising rapidly since the first quarter of 2022. This increase in losses is now at a rate not seen since the market crash of 2008

Experts predict that it’s far from over. Currently, losses stand at 3.63% with a 1.5% increase from the previous year, and Goldmine sees them rising further to 4.93%. This is happening at a time when Americans owe more than $1 trillion on their credit cards, according to the Federal Reserve Bank of New York, setting a record high. Analyst Ryan Nash wrote in a note on Friday, “We believe delinquencies can continue to rise seasonally through mid-next year and that loss won’t peak for most issuers until late 2024/early 2025.”

It’s noteworthy that the unusual aspect here is the acceleration in losses outside of economic downturns. Nash pointed out that out of the past five credit card loss cycles, three had a recessionary character. The two that occurred when the economy wasn’t in recession were in the late ’90s and the mid-2015 to 2019 period. He used history as a guide to further analyze these losses.

The Loan Increase Phenomenon 

He also noted that history shows that after an increase in loans, losses peak within eight to nine quarters. This means that the credit normalization cycle is halfway there, leading to the prediction for late 2024 and early 2025 as the peak period, as they suggested.

Nish Capital One Financial poses the highest risk, followed by Discover Financial Services, according to Goldman Sachs analysts. As Americans take on more debt and credit card borrowing reaches record levels in the United States, credit card losses are experiencing an “unusual increase” for issuers that could persist for at least another year.

According to Goldman Sachs, credit card losses, which stood at 3.63% in September 2021, have risen by at least 1.5 percentage points since then and have been increasing at the fastest rate in nearly three decades since the first quarter of 2022, despite the global financial crisis being in the rearview mirror.

“Insights from Goldman Sachs Analyst Ryan Nash”

Goldman Sachs analyst Ryan Nash noted in a memo on Friday that “the rise in losses outside of economic downturns is unusual.” Out of the past five credit card loss cycles, three occurred during recessions, including the early 1990s, early 2000s, and the Great Recession of 2008. The other two were during the mid-’90s and from 2015 to 2019.

Furthermore, year-over-year growth in loans has increased by 22% annually, which is significantly higher than the -13% annual rate seen just a year ago, and credit card borrowing has reached a record high of over $1 trillion on Americans in the second quarter of 2023, according to Federal Reserve data.

Goldman Sachs expects credit card losses to potentially reach 4.93%, with most issuers hitting their peak in late 2024 or early 2025, according to their projections. They anticipate Capital One (COF) and Discover (DFS) to have the highest losses, while Synchrony (SYF) and American Express (AXP) are expected to see increases until 2025.

Interest Rate Trends for Middle-Market Credit Cards

Interest rates for middle-market credit cards, as of September 2023, increased by one percentage point to 24.12% after remaining flat the previous month. The average advertised interest rate for credit cards in popular card offers typically mirrors the average APR for overall credit cards tracked by the Federal Reserve (Fed), although recent data shows a noticeable difference from the Fed’s average, which was 20.68% for Q2 2023, indicating that the Fed uses a relatively small sample of banks to calculate its average rates and focuses primarily on advertised credit card rates.

 Advertised credit card interest rates tend to be lower than the average rates, as a credit score of 714 won’t qualify for the best rates as indicated by the Fed’s average rates. Increases in the Fed’s rate, which started in 2022 and continued into 2023, are expected to lead to adjustments in credit card interest rates in response to rising borrowing costs. 

Availability of Card Rates Across the Credit Spectrum

However, the availability of card rates at both lower and upper ends can vary from month to month due to competitive pressures and individual bank risk policies. In response to the rising cost of borrowing, the Fed adopted a hawkish policy to counter the recent surge in inflation, particularly dramatic increases in consumer prices in Q4 2021 and all four quarters of 2022.

The most recent increase announced in July was for 0.25%, which matches the previous hikes in May, March, and February, but is notably lower than the 0.75% increase seen in the second half of 2022. While the Fed increased rates in its recent meeting on July 26, it has left rates unchanged or raised them again at its next meeting on September 20. Nearly 93% of traders bet on the Fed keeping rates stable in its next meeting, despite economic conditions. The Fed’s rate affects a wide range of consumer loans, including credit cards, by influencing the cost of borrowing.

Several factors determine how individual credit card rates are set, with credit quality being the most important. Those with the best credit scores receive the lowest rates, while those with no credit or poor credit receive the highest rates. Other factors include the type of credit card and specific issuer policies based on risk.

Revised Interest Rates for New Credit Card Applicants

We’re here to break down the average interest rates for new credit card applicants, typically found in over 300 credit card offers. These rates are often categorized based on credit quality, card type, and issuer profiles.

Variations in Interest Rates According to Credit Types

Interest rates can vary based on the type of credit score used, but the most commonly used credit score for credit card applicants is the FICO score.

Different Credit Card Types and Their Associated Interest Rates

1.   Balance Transfer: Credit cards that offer promotional rates, often 0%, for one year or more.
2.   Business: Designed for small business owners, these cards provide rewards and perks related to business expenses, working capital, and purchases.
3.   Low-Cost: These cards are designed for individuals with no credit history or minimal annual fees, but they often come with higher interest rates.
4.   Rewards: Credit cards that offer points, miles, or cashback rewards on purchases.
5.   Secured: These credit cards require a security deposit and typically function as a starter credit line.
6.   Student: Designed for college students with limited credit history and credit education requirements.

Interest Rates Influenced by Credit Card Issuers

Credit card issuers have policies based on various risk factors that impact the advertised interest rates. Ultimately, the rates are extended to consumers based on their credit scores.

Changes in Prime Interest Rates

Credit card interest rates are primarily tied to the prime rate, which is set at 8.50% currently. Following several increases by the Federal Reserve, starting in 2022, there has been an additional 450 basis points increase. Most recently, in July, there was a 0.25% increase.

Trends in Delinquency Rates

The delinquency rate on credit cards, defined as 90 days or more past due accounts, has been relatively low in recent years. It reached a high of 2.76% in January 2020 and then dropped to as low as 3% in 2021, in April, marking the lowest point in 40 years. However, due to supply chain issues, increased consumer demand, and higher expenses on credit cards, delinquency rates rose significantly to 2.77% at the end of the second quarter in 2023. This is 34 basis points higher than Q1 2023 and half a percent higher than the beginning of the year.

Trends in Credit Card Debt

Overall consumer revolving credit card debt crossed the $1 trillion mark just before the onset of the pandemic and then quickly plummeted to a low of $970 billion in January 2021. Since then, revolving credit card debt has risen above $1.24 trillion for the most recent period. Federal Reserve data for March 2023 directly reflects changes in consumer demand and credit card expenses. The supply chain issues and the resulting increase in costs, along with reduced consumer demand, have also contributed to the highest level of inflation since the early 1980s. The Federal Reserve’s practice of raising rates overnight, which directly affects credit card interest rates, adjusts as they align with basic rates.

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