So far, the first quarter of 2022 looks strong from a credit card risk perspective. Seasonally adjusted credit cards moved up slightly in February, up to $826 billion, from $802 billion in January. Reporting on delinquency rates, which lag portfolio values, ended at 1.62% in 4Q2021, slightly worse than the record low metric reported in 2Q2021.
But as gas prices surge and inflation outpaces salary growth, credit risk managers should temper their expectations for loan loss reporting in 2022 and anticipate erosion in 2023 if inflation continues at current rates. As we approach the end of the first quarter, revisions to loss models are appropriate.
CNN cited research that suggests the “average American household will pay $2,000 more for gasoline in 2022” and that the seasonally adjusted spending rate for groceries will add at least $1,000 to grocery prices. Overall, consumer prices “surged 7.5% in January, the most since 1982,” according to the article.
A recent U.S. Congress Joint Economic Committee reported:
Americans this past year have faced the highest—and fastest climbing—inflation rates in four decades. Rapidly rising prices are harming American families, eroding the value of their paychecks, and increasing the financial strain of buying everyday goods like groceries and gasoline. Inflation is also eroding the value of savings, making it harder for Americans to build wealth.
Credit card managers need to consider two essential business measures: 2022 results and the impact to 2023, as it affects credit card originations and risk management.
The good news is that revolving debt will continue to increase as consumers’ budgets tighten. As a result, more debt will generate interest, and more debt will accrue because of household budget stress. However, the opposite side of the coin is that the outstanding debt will become riskier. Lay a few basis points on top of current interest rates, expect more delinquent credit card account portfolios. The metric will not pop instantly, but anticipate a steady rise in risk.
2022 has arguably six weeks remaining before the year locks into managing what is in the pipeline for consumer debt. Come June 30, there will be 180 billable days so that all new delinquencies will be 2023 risk, not 2022. Collection performance, reflected in the 1.62% rate discussed above, will likely erode and return to normal levels. There will be a modest impact on the late 3Q2022 write-off, and it would not be a shocker to see the 1.57% charge-off rate climb to 2%.
As you consider new rates on Russian oil imports, be sure that the rising credit card risk will rise. It is a global issue that warrants some tightening of credit lending policies but not a call to slam on the brakes.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
