Credit card delinquencies have never been better than they were in 2021. According to the Federal Reserve, delinquent accounts for all commercial banks hit a 20-year low in Q2 2021 of 1.48% and rose slightly in Q3 and Q4 2021 to the latest metric of 1.62%. Plenty of reasons were behind this improvement, ranging from loan deferments under COVID to unprecedented payouts through the CARES Act. It might seem as if operational strategies were running at optimal levels for credit managers. Still, there is no time to rest on their laurels from recent numbers on delinquency in subprime lending. It is time to button down and prepare for a storm. Reported numbers by American Express, Capital One, Chase, Citi, and Synchrony indicate that credit trends are “normalizing,” but when you look around at subprime segments, where many lenders focused as they attempted to rebuild their diminishing credit portfolios, it is time to circle the wagons and prepare for a Q4 2022 storm.
The WSJ reports today that subprime credit cards and personal loans are rising quickly, according to data from Equifax.
The share of subprime credit cards and personal loans that are at least 60 days late is rising faster than usual, according to credit-reporting firm Equifax Inc. In March, those delinquencies rose month over month for the eighth time in a row, nearing their pre-pandemic levels.
Delinquencies on subprime car loans and leases hit an all-time high in February, based on Equifax’s tracking that goes back to 2007.
Many people, including those with less-than-perfect credit, paid off debts and built up savings during the pandemic, a surprising outcome considering that lenders at first thought borrowers would default en masse when Covid-19 hit.
WSJ cited a lending shift for embracing subprime borrowers with subprime borrowing history. Those are often classified as subprime borrowers with FICO Scores <620.
Last year, many lenders embraced subprime customers, comforted by low unemployment and fueled by an eagerness to rebuild loan balances that took a hit early in the pandemic.
Subprime lending hit records last year when measured by the total dollar amount of personal loans originated and spending limits on new general-purpose credit cards, according to Equifax.
FICO Scores improved during the early days of COVID as consumers received CARES Act funds, so many classified as subprime may have been deep-subprime shortly before the pandemic.
When you add in recent interest rate increases on consumer loans and inflation running at 8%, credit card issuers need to begin staffing and tightening credit lines because the credit storm will soon be upon us.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
