The credit card market weathered significant headwinds last year, and the lingering effects are expected to cast a long shadow over 2024. Inflation, the potential for a recession, and rising card delinquencies all contribute to the uncertainty. Credit card issuers will need a formidable playbook to navigate these turbulent waters and emerge successfully.
In his Credit Card Data Book Part 1: Environmental Factors report, Ben Danner, Senior Analyst for Credit and Commercial at Javelin Strategy & Research, explored how current economic conditions are shaping the credit market. He also gave a glimpse into the 2024 economic landscape and offered strategies credit card issuers can implement to prepare for a possible recession.
How Macroeconomic Headwinds Affect the Credit Market
To say that 2023 was a challenging year for the economy is an understatement. The United States saw inflation hit a 40-year high, fueled in part by soaring energy costs resulting from the ongoing conflict in Ukraine, as well as residual effects of the pandemic, such as supply chain bottlenecks.
To counteract inflation, the Federal Reserve enforced a series of interest rate hikes. Some aspects of the economy have remained unchanged thus far, and that will have implications for the current credit market.
“Interest rates are obviously high,” Danner said. “The Fed is trying to control that. They’re still very high for credit cards, and consumers can only take so much of the pain of having to deal with high interest rates. But if we look at the traditional factors like the unemployment rate, it’s very healthy. If we look at the personal savings rate, it’s pretty low. Consumers aren’t saving a lot of money. It’s lower than it was pre-pandemic, so that’s another sign that’s not great.
“Consumer expenditures are still up, so people are spending a lot of money. Interest rates are very high, and if you end up revolving debt, you’re going to be paying a lot of money to revolve that debt.”
A Look at the 2024 Economic Landscape
Predicting the economic future is always tricky, but one can rely on existing indicators and current trends. Without question, at the forefront of everyone’s mind is inflation. The Federal Reserve must strike a delicate balance between taming rising prices and sidestepping a recession.
According to Danner, severe credit card delinquencies are beginning to emerge, with consumers unable to pay off their credit cards in full. An increase in delinquent accounts can be problematic for card issuers, as these accounts may eventually become charge-offs, which are direct losses for issuers. To collect on these accounts, issuers need to invest in collection resources, further eroding their profit margin.
Unfortunately, unpaid credit card balances have a negative ripple effect on consumers and issuers.
“The amount of spend on cards is going continue to increase, especially with inflation still not being where it needs to be, around 2%,” Danner said. “It’s going to be tough for some folks this year, depending on whether the Federal Reserve lowers the rates.”
Strategies Issuers Can Employ to Brace for Possible Recession
Among the myriad issues affecting the economy, credit issuers must take proactive measures to ride out the turbulence. It all begins with shielding themselves from further risk.
“The first is at origination, looking at tightening your underwriting for people that are in difficult situations,” Danner said. “Try to find a card product that would be better for them, like a secured card product. Don’t throw them into an unsecured line of credit (if) they’re going to struggle down the road.”
In addition to stricter underwriting practices, Danner recommends that issuers find an effective credit line decrease program, which reduces the available credit limit on existing accounts.
Good, old-fashioned observation is in order in times like these. It’s important that issuers keep their finger on the pulse of what is happening.
“Watching the Fed and seeing what the Fed rates are doing, which everyone will be doing, that’s certainly a big piece of this puzzle,” Danner said.
