If you’re thinking about applying for a new credit card or asking for a higher limit on a card you already have, you might want to do that sooner rather than later. Credit cards, and credit card issuers, have been on a good run lately, but the good times might end — or at least slow down — in 2018.
What’s happening with credit card debt
Overall credit card debt hit an all-time high in 2017, and about 110 million new accounts were opened in 2016 — a full 50% increase over 2010 — according to the Consumer Financial Protection Bureau. In total, Americans who have a credit card enjoy a total credit limit of an astonishing $4 trillion – just shy of the $4.4 trillion all-time high set during the housing bubble, the CFPB says. Consumers with the best credit have seen their credit lines sharply increase — from $29,176 back in 2010 to $33,371 in 2017, according to TransUnion. TRU, +4.51% And by the end of last year, a record 196 million U.S. consumers had access to credit cards or other kinds of revolving credit.
In other words, it’s been relatively easy to get new cards and higher limits lately. But not for long, warns Mercator Advisory Group in a recent report.
Signs of trouble that began to creep into the credit card market during 2017, such as higher delinquency rates, will make card-issuing banks a little more shy about credit granting this year, the report, called The Credit Card Data Book: 12 Significant Indicators, says.
“Increases in delinquency will drive up costs and negatively impact credit losses, a major industry expense,” according to the report. “Less profitability at credit card issuers in the United States…is likely to lead issuers to tighten credit after a banner growth year.”
Among those signs of trouble: The average debt of cardholding consumers increased 9% over the last two years, according to the CFPB. That could be a mixed bag; it might mean consumers are overspending, and at risk of default. Or it might mean they are optimistic about their future income. But cardholders with low credit scores have seen their balances increase at faster rates. And cardholders with deep subprime scores — those predicted to have the most trouble avoiding late payments — have seen a 26% increase in their average credit card debt over the last two years, the CFPB says.
A separate report from TransUnion claims those with lower credit scores had been reaping the benefits of wider access to credit. Much of the growth in new accounts were subprime accounts, adding to the potential for delinquencies. There were 2.3 million more subprime credit card holders in 2017 than 2015, TransUnion says.
At the same time, late payments crept up last year. The 90-day-plus delinquency rate of credit card debt was 7.47% of balances, up from 7.08% in the same quarter one year ago, according to the Federal Reserve. And TransUnion says that “serious delinquency” rates increased to 1.68% in the third quarter of 2017 from 1.53% in the third quarter of 2016. A recent Pew study rings the alarm bell, too. It found that just 46% of Americans earn more than they spend every month. That means increased likelihood that credit card bills eventually won’t get paid. Card issuers are paying close attention to these kinds of warning signs, says Mercator study author Brian Riley.
“You have to watch out for these trends,” Riley said in an interview with Credit.com “When a boat starts to rock, you have to slowly stabilize it.”
The real measure of credit quality is the “write-off rate,” Riley says. The sweet spot is about 3% of balances. During the recession, the write-off rate soared to 10%. He’s not predicting anything like that hefty spike in uncollectable debts, but he expects the write-off rate will rise to about 4% in 2018 — and that will get the attention of credit decision makers at banks.
“We’re not going to hell in a handbasket, but there are signs (the boat) is starting to leak and that’s really when you have to handle things.”
Smart card issuers are proactive in protecting their portfolios, and that means they’ll more frequently check their account holders’ credit scores looking for signs of trouble – and act accordingly.
“If they need to pull you back, they will,” Riley said. “Don’t assume those high credit limit cards will be there forever.”
Riley says card-issuing banks will also be feeling the sting from reforms that were part of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act). That law made it much harder for banks to levy junk fees on consumers.
“Reductions in noninterest revenue…have disrupted the business model,” his report warns. Indeed, the CFPB says the CARD Act has saved consumers $16 billion in “gotcha credit card fees.”
What should you do?
There won’t be a dramatic pullback in card offerings, barring some unknown economic surprise, Riley said. In fact, he expects total outstanding credit limits to set an all-time record this year. Still, some consumers are likely to see limits reduced or won’t have quite as easy a time getting new cards, he warned.
That means consumers should plan ahead for any credit needs – which is sensible at any time. If you are thinking about doing a home renovation or some other big-ticket item, don’t assume you’ll have an easy time opening a new card to help pay for it. If you don’t have enough set aside to handle an emergency like a busted hot water heater or auto transmission, don’t assume you’ll plug that gap with a generous credit card credit limit. Start building that emergency cash fund now.
It’s also a good idea to take stock of the credit cards you already have. Riley recommends consumers at least occasionally make purchases with all their open credit cards. If an issuer sees a consumer “leaves a card in the junk drawer” and never uses it, that account is more likely to be hit with a credit limit reduction, he said.