Red flags are flying in the credit-card industry after a key gauge of bad debt jumped to the highest level in almost seven years.
The charge-off rate (loans that companies will never collect) rose to 3.82% in the first three months of 2019. This is the highest level since the 2Q 2012, according to Bloomberg Intelligence data. Loans 30 days past due, an indicator of future write-offs, increased at all seven of the largest U.S. card issuers.
There’s been a “degradation” in credit quality for certain customers, according to Richard Fairbank, CEO at Capital One Financial. Fairbank said some customers with negative credit events during the financial crisis are now seeing those problems disappear from their credit-bureau reports. “We may be looking at data that might not paint the full picture of a consumer’s credit history,” he explained.
“This has been one of the longest recoveries, so … we have been contracting credit policy at the margin and tightening,” said Discover CEO Roger Hochschild. Hochschild said his company has been closing inactive accounts and slowing down the number and size of credit-line increases for both new and existing customers.
The industry’s latest warnings build on developments in January, when fourth-quarter results showed charge-off rates near the lowest in decades were coming to an end. Competition for the highest-quality customers remains fierce but a growing wariness about the potential for a rise in bad debt has led many issuers to tighten underwriting.
This hasn’t reached crisis levels yet, as charge-offs remain not far from historic lows as banks benefit from low unemployment rates in the U.S. However with overall interest rates still near record lows, the fact that charge offs are already surging is worrisome.