Americans are using their credit cards more than ever - and some experts think that's a good thing
- The number of credit card accounts increased by 2.6% compared to this time last year.
- Some experts believe the increase is a good sign for America's economy.
- The credit card delinquency rate has also risen slightly, increasing from 1.69% to 1.78%.
Credit card use is on the rise.
The number of credit card accounts increased by 2.6% compared to this time last year, according to TransUnion's Q1 2018 Industry Insights Report. Currently, there are 416.5 million credit cards and 174.9 million consumers with access to a credit card.
Also on the rise is the average credit card debt per borrower, which increased by 2.63% since last year, jumping from $5,332 to $5,472. The serious credit card delinquency rates per borrower was 1.78% as of the first quarter in 2018, an increase from 1.69% a year ago.
This is the first time America has seen a delinquency rate this high in quarter one since the 1.77% delinquency rate in 2012, although it remains below the 10-year first quarter average of 1.91%.
The most balance growth on a percentage basis came from Generation Z and millennials, but Generation X borrowers had the highest balances of any generation with an average loan balance of $7,029. That's a whopping difference compared to Gen Z's average loan balance of $1,181, the lowest of all generations.
With more people borrowing and more people failing to pay back those funds in a timely fashion, does this concoction create a lethal cocktail for the American economy?
Paul Siegfried, senior vice president and credit card business leader at TransUnion, doesn't think so.
"We believe it's a positive sign for the economy that more consumers have access to credit and that delinquency rates, while growing, are doing so at a slow pace and remain below levels observed immediately post-recession," Siegfried said in a press release.
Andrew Haughwout, senior vice president at the New York Federal Reserve, explained to Reuters that delinquency rates surged during the financial crisis and lenders tightened their standards post-crisis.
"Credit cards are a vital part of the consumer credit economy, and their continued good performance bodes well for other credit products such as auto loans and mortgages. It's also a good indicator of the product's popularity that the youngest generations continue to grow their card balances and generally appear to manage their debts effectively," Matt Komos, vice president of research and consulting at TransUnion, said in the release. "In line with our forecast for the year, the consumer credit market continues to perform well, and we do not see any indicators of concern in the short- or mid-term."
Now that the US is nearing full employment, lenders are open to taking risks and extending cards or limits to those with low credit scores, allowing them to borrow more. Particularly, there has been an increase in serious delinquencies among borrowers with credit scores below 660, reports Reuters.
In September 2017, the Wall Street Journal reported on a similar trend, noting that the poor loan performance was puzzling when coinciding with a strong labor market. But Richard Fairbank, chief executive of Capital One, remarked at the Barclays financial conference that it's not unusual for the credit cycle to diverge from the economic cycle, the Wall Street Journal reported.
And Michael Pearce, an economist at Capital Economics, said late last fall that he doesn't foresee any substantial short-term economic or financial fallout from the credit-card sector, even if delinquencies were to spike more.
However, that's not to say these trends aren't worth watching with a cautious eye.
While Pearce doesn't envision a credit card delinquency spike as a major threat currently, he does recognize that the increase may be an early sign of stress in household finances.
And as Reuters points out, even though the rates are significantly below the levels during the 2008-2009 financial crisis, rising delinquencies could result in higher loan losses for lenders.
"It is not clear yet what effect it will have on the future," Haughwout told Reuters. "But historically it has been the case that once these delinquency rates start to rise, they can continue to rise."
Matt Schulz, senior analyst at CreditCards.com, also told Reuters that stagnant wage growth is to blame for higher credit card delinquencies - coupled with rising debt and slowly rising interest rates, it's what he calls "a troubling combination."
That's not good considering the average interest rate on a new credit card has hit a record high of 16.71% and the Fed recently raised its benchmark interest rate from 1.50% to 1.75% - the first of three expected hikes in 2018.
And if the US economy turns for the worse, Schulz said, the delinquencies could be problematic as accumulating credit card debit during good times will be difficult to pay back during hard times.
That's something to bear in mind considering that the next recession may be closer than you think.