Credit card originations are the lifeblood of an issuing business. New accounts are critical as credit card issuers rebound their portfolios after COVID-19. At the peak, revolving debt in the United States was $1.1 trillion in 2019. Volumes fell by $500 billion in Q12021, which impacted interest revenue for credit card issuers. With an Average Interest Rate of 16.30%, that represents a monthly interest revenue loss in the neighborhood of $6.8 billion.
That’s a lot of bananas, as they say.
The challenge is to get people confident enough to carry debt, or at least needy enough to make the payments.
And, in the U.S. market, with 500 million active credit cards and 130 million households, what do you do? From looking at recently published numbers by Equifax, it seems like one solution might be to lower the score threshold for booking a new account. Another solution is to increase credit limits in hopes that it will raise consumer confidence.
While the report does not use the dominant FICO Score as a basis, it relies on the VantageScore, an alternative. The critical credit card findings were:
- 34.1 million bankcards have been originated year-to-date. This is a 41.7% increase in new accounts from the previous year.
- Total bankcard credit limits originated YTD are $138.8 billion. This is a 22.0% increase from the previous year.
- Around 7.58 million bankcards have been issued YTD to consumers with a VantageScore® 3.0 credit score below 620. These are generally considered subprime accounts. This is a 40.0% increase over the same period in 2020.
- These newly-issued cards have a corresponding total credit limit of $5.62 billion, a 30.6% increase from 2020 levels.
- In 2021 through June, 22.2% of new bankcards were issued to consumers with a subprime credit score, with their share of new total credit limits at 4.0%. For the same period last year, the subprime share of new accounts was 22.5% and 3.8% of new credit limits.
- The average credit limit for all bankcards issued in June 2021 was $4,517. This is a 15.7% increase compared to June 2020. The average credit limit on new subprime cards was $832. This is a 16.1% increase compared to June 2020
Downgrading credit standards and raising limits is a conscious decision to build portfolios. And the timing is good as delinquency is at record low levels. The consumer challenge will be to work within those credit lines and get out of the subprime-credit score zone. The challenge for bankers is to hone their collection strategies to ensure delinquency rates do not erode due to consumer capacity or environmental issues.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
