Millions of Americans are skipping their credit-card payments as the coronavirus pandemic puts them out of work. Banks and other lenders that for years relied on heavy consumer spending to create big profits are preparing to struggle alongside their customers.
As the economy spirals, credit-card payments are one of the first places where the effects will show up. They are often the first loans people stop paying when money is tight. They are usually unsecured, so lenders have little recourse if a borrower stops paying.
Many large card issuers are letting borrowers pause their credit-card payments for a month or longer. Some are lowering or waiving late fees and interest charges, or even forgiving portions of customers’ balances.
Those suspensions will allow some borrowers to stay afloat, but only temporarily. Companies and analysts expect delinquencies and charge-offs to soar later this year. Banks and other lenders can only shoulder the unpaid loans for so long before they face a reckoning too.
Banks hope that delaying payments will buy time for the economy to recover and consumers to get back on track. But for people who have no idea when they will be back at work, that likely won’t be enough. Many Americans were already overstretched even before the pandemic, tapping credit cards and other debt at record levels.
Discover, Capital One, American Express Co., JPMorgan Chase & Co. and other card issuers have socked away billions of extra dollars to prepare for big potential loan losses. “We clearly have already had significant deterioration,” said Roger Hochschild, Discover’s chief executive, in an interview. “This was very quick and cataclysmic.”
Some lenders are also tightening the credit available to new applicants or existing customers. Other banks have shut down credit cards that haven’t been used in a while or lowered spending limits. These measures were being taken before the pandemic as a way to lessen risk but will leave some borrowers without access to credit when they need it most.
Missed payments aren’t the only problem for card issuers. Card spending in travel and other categories is plummeting, so banks won’t get as much revenue from card swipe fees. With people under stay-at-home orders, many are not out shopping with store credit cards – which is a problem for banks that specialize in these cards.
“For the next two years or so until everything settles, [credit cards] will be much less profitable and more risky,” said Brian Riley, director of credit advisory services at Mercator Advisory Group.