In its latest consumer credit card market report, the CFPB says the most creditworthy borrowers seem to use credit cards in lieu of other payment methods, while those at the low end of the credit spectrum have seen a faster growth in credit card debt levels than others.
Credit card consumers continue to hike up their spending, while approval rates have dipped since 2016, according to the Consumer Financial Protection Bureau’s 2019 report on the consumer credit card market.
New technologies are enabling lenders and improving the card application experience for consumers. However, delinquencies on newly originated private-label debt in particular are higher than the historical trends, both overall and within different credit tiers. This comes about as the balances outstanding on these cards have grown more than the purchases made with them.
The consumer watchdog body notes in its report, “Credit cardholders continue to use their cards to facilitate transactions, smooth consumption and earn rewards, all with the added security of stringent limitations on liability. Consumer satisfaction with credit cards remains high, while consumers’ debt service burden remains near its lowest level recorded in more than a decade.”
Average credit card debt at $5,700
For general-purpose cards, the average credit card balance was at $5,700 at the end of 2018, its highest level since mid-2009. For so-called super-prime – or most creditworthy – borrowers, average debt levels crossed the $5,000 high of late 2008.
It seems more likely that the highly creditworthy are substituting credit card use for other sources of financing, rather than taking on more credit, the CFPB notes.
Purchase volume on credit cards rose 30 percent from 2015 through 2018, reaching $3.7 trillion on general-purpose cards in 2018, which is nearly twice the high it touched before the recession. The super-prime credit category accounted for 82 percent of this spending, while prime borrowers made up 12 percent and others 5 percent.
In the same period, card balances grew 20 percent, and credit lines increased by 7 percent.
While consumers across the credit spectrum have seen a rise in their credit card debt levels, there has been faster growth for those at the lower end of the credit spectrum, compared to those at the higher end. And the former have also taken on more credit cards on average.
Card delinquencies on the rise
As the level of credit card debt has risen in the post-recession years, the level of delinquencies and debt written off by issuers has started to rise in the last two years. Though delinquencies began to fall after 2011, the delinquency trend started reversing in 2017, and by 2018, 9 percent of general-purpose cardholders and 4.5 percent of private label cardholders reported at least one “severe delinquency” in the last 12 months.
And late payments on debt taken on recently by consumers are rising, for private label cards as well as general-purpose cards. This is occurring across the board and also within each credit tier.
Late payments on the more recently originated debt are also at a higher level than that associated with past vintages of debt after the same period.
- The rising total cost of credit to consumers, which in 2018 was 18.7 percent, was led by a rise in variable interest rates on general-purpose cards, which are tied to rate indexes that have been rising with the Federal Reserve’s interest rate hikes. Private label cards, on the other hand, have seen their cost of credit decline, as fewer of them are tied to indexes.
- Even though the number of new accounts opened and the credit lines on these accounts have reached a plateau as approval rates have dipped, the total credit available to consumers is nearly back to a prerecession high of $4.3 trillion, as a result of a rise in unused credit associated with the super-prime consumers.
- Consumers are more inclined to turn to rewards cards, making them more costly for the issuers. However, the use and cost of cash advances and balance transfers hasn’t changed much. The use of balance transfers remains popular, growing 38 percent annually from 2015 through 2018, while the cost of this feature has declined. Growth in balance transfers is also higher than the growth in balances and purchases.
- Since 2017, the rate of growth in accounts that have been settled through for-profit debt-settlement companies has been faster than the growth in card issuers’ accounts receivable overall.
- Cardholders have taken more to the use of digital devices, including mobile phones, to use and pay for their credit cards. And card providers are turning more to artificial intelligence and new sources of data to better manage their risk and provide customer service. Consumers are also more likely to apply for a card on their mobile devices, particularly in the case of those with lower credit scores.