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Data for today’s episode is provided by Mercator Advisory Group’s Viewpoint: Credit Card Account Forbearance: Not Forgiveness and Not Forever
Credit Card Forbearance Results So Far:
- The percentage of credit card accounts in financial hardship typically runs less than one basis point of total accounts.
- That means that less than 1 out of 10,000 accounts sufficiently qualify for special aging treatment to work out their delinquency.
- Payment forbearance was a common strategy to mitigate COVID’s impact on household budgets.
- This action made account conditions appear better than they typically would be, moving delinquent accounts towards write off.
- Credit card forbearance peaked in May 2020 just short of 4% of total accounts and now hovers around 2%.
- The effect of the CARES Act has been substantial, with credit card charge-offs declining throughout the recession.
- In practical terms, forbearance has allowed issuers to delay an inevitable rise in charge-offs for cardholders who are permanently impaired.
Payment holidays helped consumers get through unexpected credit risk during the pandemic, but before long it will be time to pay the piper. Suppressed delinquency volume makes risk appear under control, but the day of reckoning will soon be at hand.
COVID’s sudden grip on cardholders disrupted household budgets worldwide. Countermeasures supported by consumer protection agencies allowed for payment holidays, but sooner or later the industry will need to contend with a disrupted credit cycle. Issuers must be prepared for the upcoming storm.