At the risk of being a Grinch during the winter holiday season, credit card issuers should begin to exercise caution on the growth of outstanding household debt and the pace of growth.
The most recent G-19 report by the Federal Reserve indicates revolving debt in the United States hit $1.052 trillion in October 2019, very near the highwater mark experienced for Q418. Under normal circumstances, this would indicate that seasonal trends would place the number slightly higher in 2019 as winter holiday purchasing takes place. That is a healthy trend.
On the other hand, two warning signs are beginning to boil. There is not cause for panic; however, the credit card issuers must keep a watchful eye on credit performance and delinquency. Purchase activity in December is historically high because of the winter holidays.
Issue 1: Installment loan growth is outpacing credit card growth
The indicators:
- Experian, the credit reporting agency, announced that their review of installment loans in the United States shows that high end personal loans ($20,000 or greater), grew by 14% since 2015.
- 80% of U.S. consumers with personal loans have account balances of $20,000 or lower.
- Overall, personal loan debt reached $305 billion in Q2 and continues to grow faster than any other credit product.
- Personal loan balances of $20K or lower have decreased by 3% since 2015
- Installment loan penetration in some states is off the charts. In North Dakota, the finding was that 41.1% of households now have personal loans. In Mississippi, the metric was 38.7%.
- Washington state had the highest percentage of consumers (16.6%) with a balance above $40K; the average balance was $106,920.
Here is a link to Experian’s analysis
The concern:
- Revolving credit card debt increased by $8 billion between September and October 2019.
- Fast paced installment loan growth indicates some households are no longer relying just on credit cards to fund their needs.
- While Experian’s report does not indicate where the funds for the new loans are going, the loans would fit one of three needs: debt consolidation, point of sale purchasing, or undeclared personal use.
- In any case, the increase in both asset classes, credit cards and personal loans, suggests unbridled credit usage-a sign of debt overload.
Issue 2: Credit card delinquency is bubbling up
The indicators:
- Marketplace recently cited data from TransUnion, another credit reporting agency.
- The report notes: “The percentage of consumers who are seriously behind on their credit card bills is expected to hit a decade -long high next year according to a new report from TransUnion.”
- While 90-day delinquency rates have been rising for the last five years, the predicted 2.01% increase is still significantly below 2.97% in 2009, according to TransUnion. The delinquency rate is currently 1.99%
The concern:
- Increased delinquency does not mean credit card issues should panic, mainly if the number is slowly sloping upward.
- When coupled with accelerated loan growth, creditors may be too optimistic. Unemployment is a mere 3.5%, a historic low. Economists believe the U.S. economy is “late” in the current economic cycle.
Credit managers with MBOs on portfolio growth can certainly applaud the upward movement; however, they must also live with the risk of charge-offs as the credit cycle continues. Accounts that become delinquent in January due to overextension will be charge-off problems in July.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
