The big four US retail banks sustained a near 20 per cent jump in losses from credit cards in 2017, raising doubts about the ability of consumers to fuel economic expansion.
“People are using their cards to get from pay cheque to pay cheque,” said Charles Peabody, managing director at the Washington-based investment group Compass Point. “There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden.”
Recently disclosed results showed Citigroup, JPMorgan Chase, Bank of America and Wells Fargo took a combined $12.5bn hit from soured card loans last year, about $2bn more than a year ago.
Banks have ramped up lending, wooing customers with air miles, cashback deals and other offers. The number of open credit card accounts in the US is forecast to reach 488m this year, according to Mercator Advisory Group, a rise of 108m from post-crisis lows in 2010.
Yet borrower delinquencies are outpacing rising balances. While still less than half crisis-era levels, the consultancy forecasts soured credit card loans will reach almost 4.5 per cent of receivables this year, up from 2.92 per cent in 2015.
Credit cards remain highly profitable, with a return on assets of almost 4 per cent compared with 1.4 per cent for retail banking.
Issuers collect fees from vendors for every transaction, and charge customers who fall behind on repayments high interest rates — typically about 13 per cent.
But there are concerns about the costs to the companies of the “rewards war” for affluent consumers and the risks some are taking in pursuing the less creditworthy.
At $1.3 trillion, America’s pile of student loan debt is near-incomprehensible in size.
“I’m not smart enough to say what’s going to happen with the crisis, but there’s a day of reckoning coming,” bestselling author John Grisham, who is turning the crisis into the plot of a a thriller novel, commented late last year. Those who might be considered “smart enough”—the economists, analysts, and researchers who’ve studied the issue intensely in recent years—have been keeping a wary eye on the swelling figures, and have come to a bleak conclusion. A new report from Brookings, a think tank, suggests that the default rate on student loans could rise a lot higher than previously expected.
Most research on student debt examines default rates three to five years from when repayment begins, arriving at an average default rate of 11.5%. Brookings used a new dataset to assess default rates over a longer time horizon. Applying trends from older cohorts to newer ones, the study found that default rates could rise as high as 40% by 2023.
The study looked at the default rate for all first-time college students who started university in 1995 and 2003, following them from the moment they matriculated through to 2015; the analysis revealed that default rates barely taper off even a decade after starting school. What’s more, 10 years after taking out a loan, around 14% of all 1995 entrants had defaulted—after 20 years, that figure rose to 25%.