June 6, 2018

Are the Halcyon Days of Low Credit Losses Coming to an End?


Lenders enjoyed historically low credit card losses from the end of the Great Recession until roughly 2016. Data from the last two years, though, indicate that losses have begun to climb, reaching a 5-year high of 3.46% in 2018’s first quarter. Lenders need to focus on increasing underwriting standards and setting aside funds for losses.


Credit card issuers have been enjoying boom times on cards since the end of the Great Recession in 2009. Credit card balances have risen at a robust pace, climbing 7% between early 2016 and early 2017. Balances on credit cards nationwide hit more than $1.03 trillion in early 2018 according to the U.S. Federal Reserve, a historic high.

Credit card losses are likely to climb in the future.

Average Net Charge-Off Rates Climbing

Credit card lending institutions enjoyed not only record growth in balances but record low credit card losses for a preponderance of the 2009-2016 period. But that may be coming to an end, according to the Wall Street Journal.

Losses on credit cards have been increasing for the last two years. In the first quarter of 2018, Fitch Ratings reported that the average net charge-off rate hit 3.46% for 8 of the biggest issuers of credit cards. That’s the highest net charge-off rate in almost 5 years.

While the increase is not unexpected, it is troubling because it has occurred in a time of record highs in the employment rate as well. Consumers more frequently exhibit difficulty paying credit cards when the economy slackens. 

Not only is the rise in losses an issue, but credit cards are likely to be less profitable than they have been going forward. Cards have been one of the most profitable categories since the Great Recession ended. While interest rates are in a period of expansion, cards have been in a highly competitive race for some time. Competing lenders are trying to lure consumers with rewards, perks, and bargain rates.

The potential for rising losses has caused lenders to prepare for write-offs in the future by setting money aside and increasing their underwriting standards. As a result, growth in credit card balances has slackened, from 6.1% in March 2017 to 4.8% in March 2018.

Credit card losses are also very likely to affect lenders’ profitability. Mercator Advisory Group Inc. forecasts that rising losses and the necessity for increased cost cutting will cause returns on cards to decrease to 3.5% from an estimated 3.8% in 2017 for 14 big banks focused on cards.

Banks need to tighten underwriting standards and set aside reserves for losses.

Lenders Turn to Personal Loans for Growth

As a result, lenders with unsecured personal loan and line offerings have turned to increasing that segment as an opportunity to enhance growth. They are focusing on consumers whose credit scores are high in an effort to avoid losses. One potentially attractive group of consumers are those with credit card balances month to month, as personal loans can offer lower rates.

Personal loan solicitations are in the midst of their own boom, with mailings soaring 46% year over year in the first quarter. It was the fifth straight quarter of record highs.

Turn to Experienced Loan Advisors

As losses on credit card portfolios rise, lenders will need to refocus attention on the nonperforming parts of their portfolios. The experienced loan sale advisors at Garnet Capital can help you manage nonperforming assets in a compliant manner.

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