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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
The Outlook for 2021 Is Cloudy for Both Credit Card Issuers and Cardholders:
- Looking at the hardship data, it’s clear that subprime accounts were most affected at the peak of the COVID crisis.
- In May and June, subprime accounts outpaced prime accounts by nearly 200 basis points rates of hardship.
- By October 2020, the spread between prime and subprime narrowed to 100 basis points of hardship rates, where it plateaued.
- Reasonable expectations for card issuers might expect incremental charge offs of 2-3% four months after the “official” end of the crisis.
- It will almost certainly be the second half of 2021 or into 2022 when charge offs are realized.
- Hardship status of charge off rates improve on a lag of about 3 months from unemployment drops.
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.