In recent earnings reports, credit card companies noted seeing a few signs of slowing economic growth, with consumer spending relatively unchanged from the previous quarter. However, according to a recent WSJ article, this may not necessarily be a bad thing for credit card companies in the near term.
Credit card companies make their money off fees for processing payments, as well as from charging interest on the balances that customers accumulate. Therefore—at least on paper—decreases in spending would inevitably affect profits, as customer have smaller credit card balances.
But according to the WSJ article, when people are being more careful with their money, they may be less likely to borrow more than they can afford to pay back. This conservatism could potentially reduce credit risk. Overall, this could help keep the economy more stable and prevent losses for lenders. The WSJ noted:
For now, measures of credit risk like 30-plus-day-delinquency rates are still mostly rising, but generally only normalizing to levels in keeping with what was seen pre-pandemic. This suggests that a change in the macro forecast might enable lenders to release some of their reserves and boost future earnings.
Stock values of credit card companies, such as American Express and Discover, have been surprisingly stable, given the increased interest rates. While increasing interest rates put strain on lending overall, it seems that in the short term, reduced credit risk may have offset lack of growth in consumer spending.
“Credit cards are a foundational part of the consumer budget, and issuers are well prepared to help cardholders navigate the uncertain times ahead,” said Brian Riley, Co-Head of Payments at Javelin Strategy & Research. “Consumers need to maintain their accounts, and when necessary, taper their spending habits. Issuers concurrently must watch for deterioration, but right now, the risk, though rising, is under control.”