Credit card issuers are navigating a landscape filled with macroeconomic challenges, regulatory uncertainty, and financially strained consumers. Unfortunately, the road ahead remains uncertain, making it critical for issuers to take proactive measures to protect themselves as charge-offs and delinquencies mount.
In the Credit Card Databook, Part 2: Balancing Risk and Reward in a Resilient Economy report, Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research, detailed the challenges plaguing the credit card industry and the steps issuers can take in the face of increasing uncertainty.
Higher Rates, Higher Risk
The report delved into the macroeconomic factors impacting the industry—from unemployment to inflation. High interest rates have also posed a key challenge for both consumers and organizations.
Though the U.S. Federal Reserve has kept rates high, it has recently considered rate cuts that would lower the prime loan rate for banks, potentially reducing credit card interest rates.
“There’s a whole art and science as to when to initiate those cuts,” Danner said. “Credit card interest rates have skyrocketed into 23% to 24% range. The Fed started to cut rates, so they’ve been coming down slowly. That’s offered a bit of breathing room for consumers, especially since credit card balances have been historically high.”
The historic level of consumer credit card debt did not abate in the latter half of last year, leading to an increase in delinquencies and charge-offs. As a result, credit card issuers are closely monitoring the number of customers making full balance payments.
“Everyday consumers are holding on to these record-level high balances at these high interest rates, so there’s going to be a lot of pain with revolvers and in vulnerable segments,” Danner said. “We’ve seen a rise in the amount of customers that are making only the minimum payments, which is a little scary because it means they’re revolving. It’s a number you don’t want to see go up.”
A notable discrepancy exists between large and small banks. Many regional banks have different value propositions than their larger counterparts and, as a result, often maintain lower underwriting standards.
For this reason, smaller banks typically experience higher delinquency rates on credit cards than larger banks. This has led to surge in delinquencies, with smaller banks reaching over 7.5% in their card portfolios compared to 3% for larger financial institutions. The gap is even more pronounced because most larger banks are better equipped to weather these challenges.
A Mantra of Uncertainty
Credit card issuers are also braving a regulatory environment with little certainty moving forward. In recent years, several proposed rules could directly impact the industry, such as the Sanders-Hawley bill, which would cap credit card interest rates at 10% for a five-year period.
“That would have severe consequences,” Danner said. “Interest income is a huge piece of how credit card programs operate, and if you were going to cap that at 10%, that would have very significant consequences for programs. You could see things like increased annual fees on cards, declining rewards programs, and you could even see some programs going away entirely because they wouldn’t be able to fund it.”
There have also been recent discussions about reviving the Credit Card Competition Act, which was designed to curb the market dominance of Visa and Mastercard. The bill would require issuers to provide retailers and organizations with an alternative card network not operated by the credit card giants, potentially leading to substantial industry shifts.
Additionally, a new presidential administration in the U.S. brings further uncertainty, as many of its initiatives could directly affect the credit card industry. For example, several actions by the Consumer Financial Protection Bureau (CFPB) have been shelved or eliminated, leaving the future of these efforts in limbo.
“It’s the mantra that we’ve been using, but there is still a lot of uncertainty out there,” Danner said. “Even the idea with all these tariffs on some of our closest trade partners, that could have profound changes. It could trickle down into higher prices for consumers on goods, and higher prices means potentially less spending because consumers are tightening their wallets. It’s a cascading thing with some of these economic topics—it gets complicated quickly.”
Tightening Standards
With so much doubt, it has become clear that risk management is a central priority for credit card issuers. This has already been reflected in originations, where issuers are tightening their underwriting standards. As a result, fewer subprime and below-prime customers may be approved for credit cards in the coming months.
“The other tool they have in their toolkit is the way they can adjust the credit lines,” Danner said. “Overall, over the past year or so, credit line increases have been declining. They’ve been tightening the amount of available credit that they’re putting out to customers. It’s just another way of mitigating risk ever so slightly, although it’s less refined.
Many card issuers have fewer mechanisms in place to decrease credit lines than to increase them, even though credit line reduction programs are an important risk management tool. If a customer is struggling to pay their bill, it’s critical to have a program that can reduce their available credit, as this helps limit the bank’s exposure on that card product.
The overarching trend in the credit card industry toward tightening controls was confirmed by data from the Senior Loan Officer Opinion Survey conducted by the U.S. Federal Reserve.
“They’ve been somewhat loosening standards over the past year, but might end up tightening up again, particularly as they have to curtail some of these issues with delinquent and charged-off accounts with the higher rates that we’ve been seeing,” Danner said. “Issuers have been looking at all these trends and they’ve been responding. If you’re not responding, maybe now is the time to tighten up your underwriting just a little bit.”
