Garnet Capital Advisors Blog

April 3, 2014

Lower credit card debt could limit distressed debt sales

Consumers have been keeping a lid on their credit balances while issuers continue to hold high underwriting standards, and these issues could limit distressed debt sales by reducing supply.

Credit card borrowing has plunged since the beginning of 2008, according to American Banker. A report from the American Bankers Association showed that credit card debt fell to 5.4 percent of disposable income in the final quarter of 2013. This figure is lower than the 7.7 percent that existed in the first three months of 2008.

In addition, the effective finance charge yield - a key measure of what consumers are paying on their balances - was 11.1 percent during the third quarter of 2013, the media outlet reported. This figure compared to 12.7 percent in the first quarter of 2008.

The borrowing costs that people are paying for their credit card debt, at least according to this measure, have fallen for 13 quarters in a row, according to data provided in the ABA document and reported by Financial Advisor Magazine.

However, consumers have been using credit cards more frequently as a percentage of all transactions, according to the news source. Credit card purchases at "discretionary" merchants increased 3.5 percent in the third quarter of 2013 when compared to the same time in 2012.

"We're seeing a more confident consumer who is willing to spend more money on nonessentials because they're less concerned with the direction of the economy," said Kenneth Clayton, ABA Card Policy Council director, the media outlet reported.

While this might seem positive for consumers, it could mean trouble for the distressed debt market. Lending volume has declined since financial institutions have been tightening up their standards.

Since credit quality is higher, there is less low-quality debt than there would be otherwise. As a result, buyers might have to pay more if they want to purchase distressed debt.