Coronavirus and credit cards: Five key trends

During a time of business lockdowns and layoffs amid the general population attempting to stay healthy during the coronavirus crisis, one thing is quickly bubbling to the surface of the minds of consumers, small-business owners, banks and regulators: The state of the credit card market, and where it could go from here.

As jobless claims soar by 4.4 million for the week ending April 18, 2020 according to the Department of Labor — bringing the insured unemployment rate to 11% — there is a growing realization that the country has entered into a recession. Along with the dire economic situation, there is a distinct possibility that they may be some blowback in the credit card sector that could impact consumers and banks.

Even with a country eager to reopen for business, the coronavirus is showing few signs of abating as it has infected more than 2.73 million people worldwide (869,000 in the U.S.) and killed over 191,000 (over 49,000 in the U.S.) according to Johns Hopkins University’s Coronavirus Resource Center.

Consumers held more than $930 billion in credit card balances at the end of the fourth quarter of 2019, just as news of the coronavirus outbreak was beginning to come out of China. According to data from the Federal Reserve Bank of New York's February 2020 Household Debt and Credit Report, balances had grown by $330 billion since the first quarter of 2014, demonstrating a cumulative growth of about 40% over the six-year period.

The card balance utilization rate at the beginning of 2014 stood at approximately 23% ($660 billion in balances out of $2.91 trillion in limits), leaving banks with an additional exposure of $2.25 trillion in available limits. While the utilization rate at the end of 2019 crept up to 24% as consumers carried $930 billion in balances, it required banks to add $1 trillion in credit limits to satiate consumer demand and keep utilization almost the same. Now as the country heads into a recession, total bank exposure stands at $3.9 trillion in total credit limits, of which $2.97 trillion has yet to be drawn down from available credit.

Understandably this has many banks worried, and the shift has been dramatic. Just in January, many banks were reportedly increasing consumer credit card limits without the consumers asking for credit line increases. In a complete reversal, banks are now cutting consumer credit lines to manage their risk exposures.

Alliance Data Systems has abandoned its financial guidance for 2020 as it enters a period of significant uncertainty about the future of its cardholders and their balances.
While some consumers may occasionally revolve during peak buying periods such as the winter holidays or in time of need such as a car repair, other consumers are chronic borrowers that carry card balances for extended periods of time. This could be indicative that some folks know how to handle debt, as much as it could be indicative that some are unable to easily payoff balances.

Based on data from a's annual long-term debt survey, more than half of Americans with credit cards — 59%, or 110 million people — entered the coronavirus pandemic carrying credit card debt. Of those, about 40% had been carrying that debt for three or more consecutive years. Just over half (55%) had been carrying a balance for just over one year.

These figures fall in line with guidance from the Consumer Financial Protection Bureau, which stated that among active credit card holders two-thirds are revolvers. Additionally the CFPB found that “deep subprime” cardholders (FICO score of 620 and below) had an 85% revolve rate, with few listed as transactors or inactives.
Despite the credit card balance transfer offers that typically flood mailboxes, most consumers pay heavily to revolve balances.

According to the St. Louis Federal Reserve Economic Data (FRED), bank credit card accounts that were assessed interest for revolving a balance just as the country was entering into the coronavirus pandemic had an average rate of 16.61% in February 2020. This compares to the FRED information that reported the average interest rate on all credit card accounts was 15.09% in February 2020. In other words, consumers who revolved a balance tended to do so at a higher rate than the industry average, which included transactor and inactive accounts.

The data showed that credit card rates have remained flat for the market overall over the last 12 months, staying at 15.09% — however, the rates have eased by 30 basis points for revolvers during the same period of time. Given that the U.S. is likely entering into a recession, it is very possible that rates in general will begin to rise for revolvers due to the greater potential of default risk.
Millennials and Gen Xers are almost equally likely to carry credit card balances, yet millennials are more likely to stress about the debt. Based on data from the annual long-term debt survey conducted in early March 2020, about two-thirds of Gen X (66%) and millennials (65%) reported carrying credit card debt going into the global pandemic. This compares to just 57% of baby boomers who reported carrying credit card debt.

Stress about credit card debt is highest among millennials compared to Gen X and boomers iby a wide margin — 60% of millennials stress about card debt vs. 40% of Gen X and just 43% of boomers.

One contributing factor could be the $1.51 trillion in student loan debt, according to the New York Federal Reserve Bank February 2020 Household Debt and Credit Report, which showed 11.1% of aggregate student debt was 90+ days delinquent or in default at the end of the fourth quarter of 2019 and that the transition rate into 90+ days of delinquency was 9.2%. The report also showed that the vast majority of student debt was being held by consumers between 18-39.

Up until the coronavirus pandemic struck, the country had been experiencing an economic boom, yet 11% of student debt was already delinquent or in default with almost the same amount slipping in arrears. For people carrying a credit card balance and student loans, it’s no wonder that their age group is stressed about debt.
Credit cards are sometimes vilified because they can be perceived as enablers of driving consumers and businesses into debt. The counterargument is that credit cards offer the opportunity for cardholders to make large purchases for which they currently lack the funds and be able to pay off over time.

In taking a closer look at the types of purchases that account for existing cardholder debt, almost half (48%) was made up of basic bills such as car or home repairs and daily expenses such as groceries. According to the annual long-term debt survey, 12% of credit card debt was made up of vacations and medical bills made up another 13%.

Less than one-fifth (18%) of credit card debt was made up of retail purchases, which could include both necessary items such as work clothes and unnecessary items such as big screen TVs.