All of a sudden Americans are defaulting on their credit cards
The American economy has been fairly robust recently – unemployment hit the lowest level in 16 years and stocks reached an all-time high recently.
So why have Americans, all of a sudden, stop paying off their credit card bills?
According to Moody’s report, the previous two fiscal quarters show a sharp increase in credit card charge-offs, which is the debt that companies are unable to collect from customers.
The below chart shows how various banks have been affected by charge-offs. Over the period, Capital One, First National of Nebraska and Synchrony have been hit the hardest:
This rapid increase has been the biggest since 2009 and is surprising because the U.S employment market has been strong recently. This doesn’t mean that American consumers haven’t been dealing with hardships but banks have been issuing credit cards more aggressively while loosening their standards at the same time.
Since the financial crisis and the Card Act passing in 2009, card issuers have been fairly strict even with the added protection for consumers. It was much tougher to get a credit card, particularly if your credit was subprime.
Charge-offs and unemployment are usually linked: When people become unemployed, credit cards are the first bills that people don’t pay compared to home or car loans where people can lose critical assets.
Therefore, with charge-off spiking when there are low unemployment claims means that banks have lowered their threshold and are giving credit cards to people who are not creditworthy.
The charge-offs to unemployment claims ratios have been close to all-time lows, but as the chart shows, this has spiked back to historical averages in the previous two-quarters. According to Moody, this means that there has been a “rapid” deterioration in standards.
In the larger scheme of things, charge-offs are still at relatively low levels. According to the chart below, we are currently well below the historical average rate:
As per a senior VP at Moody’s, Warren Kornfeld, if lending standards continue to deteriorate, things might become messy very quickly especially if the economy goes downhill.
Kornfeld went on to say that even though card standards were very strict right after the financial crisis if underwriting started to slacken materially, as shown by the increase in charge-offs, the asset quality could degrade fairly quickly in the near future, particularly if we go into a recession.