Credit Card Watch: Balancing ‘Growth Math’ and Lending Risk

Americans' love affair with credit cards continues, even as warning signs suggest some may be getting beyond what they can handle. But post-pandemic trends are hard to read because credit card metrics themselves suffer from a form of 'long Covid.'

When the nation’s major banks discussed the state of credit card lending during their 2023 earnings sessions in recent weeks, they spoke in terms of card metrics “normalizing” and “stabilizing.”

It’s a theme they’ve been hitting quarter after quarter in the wake of the pandemic, higher interest rates and inflation. Analysts have been peppering big bank execs with questions, as credit card balances for the year show increases over 2022 yearend levels.

Aggregate bank credit card balances rose 15% year-over-year in the third quarter of 2023, according to TransUnion amid rising credit card delinquency levels. At the same time, high levels of new card account opening have continued over multiple quarters. (The credit reporting company will be announcing yearend numbers in a February report.)

Nonetheless, sorting out what’s going on may take a Rubik’s cube rather than a ruler.

For example, while other institutions speak of normalization as a current process, at credit-card-focused Capital One, Richard Fairbank, chairman and CEO, speaks in a different verb tense when discussing his bank’s credit card base.

Capital One Says Its Own Credit Card Business Has Already ‘Normalized’

“We believe that ‘normalization’ has run its course and credit results have stabilized,” said Fairbank in late January during the institution’s earnings briefing.

“We’re probably one of the first players to stabilize,” Fairbank told analysts. How so? Fairbank said the bank had made an unusual choice as pandemic-era spending and government rules on credit reporting combined to give credit scores a temporary boost.

“When we saw the incredibly strong credit performance of consumers, much of it driven by stimulus and forbearance, we became alarmed about credit scores — we were worried about grade inflation, if you will. So we intervened in our models,” said Fairbank. “We didn’t get fooled by that. And as a result of that, we have stabilized.”

(A 2023 study by TransUnion found that scores had increased during the first part of the pandemic but that some consumers with those higher scores began becoming delinquent on consumer credit at higher than historical levels.)

Fintech Pressure Drove Capital One Shift:

Capital One's Fairbank said that the bank had also done some tightening coming out of the pandemic because fintech lenders had increased lending to subprime and other segments, often on liberal terms.

Capital One saw yearend domestic credit card loans held for investment increase 12% over yearend 2022. Credit card outstandings had been reported up at JPMorgan Chase, Bank of America, Wells Fargo and Citigroup as well.

This trend has prompted some speculation that consumers are falling behind, an argument bolstered by rising delinquency rates.

Bank of America’s Brian Moynihan, CEO, said that “much is made about there being higher credit card balances. But people are forgetting that the economy is bigger than it was in 2019 because of inflation.”

For his part, Jeremy Barnum, CFO at JPMorgan Chase, acknowledged that “consumers have been spending more than they’re taking in” but credited this to a relatively strong labor market. The strength has been confirmed by recent federal employment reports indicating stability over the last three months (November 2023-January 2024 with unemployment at 3.7%).

On the other hand, Wells Fargo CFO Mike Santomassimo talked about the impact of inflation on credit card holders in lower income levels. “You’re going to have some percentage of people who are feeling much more stressed than the aggregate numbers would imply.

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Parsing the ‘Delayed Charge-Off Effect’

A significant impact that Capital One’s Fairbank sees on credit card issuers is what he calls “the delayed charge-off effect.”

Fairbank thinks some accounts that would have been charged off during the pandemic benefited from various forms of relief and forbearance.

“Some of them may have gotten reprieved for the long run, but a bunch of others we have certainly felt we were going to charge off over time. And that is a temporary effect that we think has been playing out over this normalization thing.”

Overall, Fairbank says Capital One is upbeat about the outlook for credit card credit. But his comments to analysts illustrate how the pandemic and the economic aftermath have shaken up the usual patterns somewhat.

For example, 2019 is often considered the last “normal” period for comparison for credit card results, a baseline of sorts. But Fairbank said some statistical noise in 2019 makes him think of 2018 as a better standard for his institution.

Similarly, he said that typically card delinquencies are usually a good predictor of charge-offs. He said that now that the delayed charge-off effect has worked its way through Capital One, this predictive relationship should work again. He said charge-offs have synched again with usual seasonal trends.

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Multiple Effects Will Be Seen as Credit Card Trends Blend

Charlie Wise, senior vice president of global research and consulting at TransUnion, says that lag effects have to be accounted for when looking ahead on cards.

For example, in the second quarter of 2023, 20.5 million accounts were opened, down 3.8% from the 21.3 million a year earlier — but still far above the 8.6 million opened in the second quarter of 2020. (TransUnion issues account origination figures with a one quarter lag to account for reporting time.)

“When there are a lot of new card originations, they hold delinquencies down for a while,” says Wise. As newer vintages age into 2024, that buffer will likely shrink, as is typical. Already, he says, delinquencies are edging higher on accounts opened in the first quarter of 2023. He says this trend will continue for some time.

“It doesn’t yet look like credit cards have turned the corner on delinquencies,” says Wise.

Related to the massive number of new credit card account openings is something called “growth math.” In a recent report, Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods, noted that consumers’ re-leveraging over the last year and a half using credit cards, exposes lenders to more risk.

“Growth math is driven by the fact that some of the ‘new growth’ comes with seasoning pressure, driving loss rates higher.”

— Sanjay Sakhrani, Keefe, Bruyette & Woods

However, Sakhrani suggested that, unless there is a major negative change in the economy, “loss rates would start to inflect favorably at some point this year.”

Another effect in the pandemic aftermath goes back to Fairbank’s comments about credit scores and using those that were temporarily boosted as credit gospel.

Wise says that during the post-pandemic period some lenders began to open accounts for consumers further down the credit score hierarchy as they searched for growth. Some of those “vintages,” as the industry refers to them, are now producing higher delinquency rates.

Wise adds that higher rates can’t be blamed for the delinquency trend by themselves, because credit card rates are already typically quite high compared to other consumer credit rates.

“There’s only one surefire way to prevent credit losses,” says Wise, quoting an industry adage, “and that’s to not lend.”

Read more: Student Loan Payments Return = Consumer Credit Thunderstorm?

Addressing Credit Card Delinquencies

Two-thirds of the U.S. population is in some degree of financial health stress, according to Jennifer White, senior director, banking and payments intelligence, at J.D. Power. Much of White’s research involves financial health issues.

She says some perspective helps here. “A large portion of consumers are managing their debt,” says White. “Their debt is increasing, but they’re managing it.”

While credit cards are currently in the spotlight, White says this stress results from multiple types of debt including student loans and personal loans, as well as cards.

She says that many credit card issuers already provide free credit monitoring tools. Often these, as well as other financial health tools offered by banks, credit unions and fintechs, enable monitoring of one’s credit score. She recommends that where score monitoring isn’t already free, it be offered at no cost.

However, many consumers don’t use the tools provided. White says that among the reasons cited is not feeling like they have enough money (and debt) to make it worth using the tools. Another is having multiple providers, each offering tools, and not being sure which tool to focus on. Others say they have their own system of some sort.

White adds that some consumers simply aren’t aware that the tools are available. She says many institutions have to do more to push them to consumers, working their marketing channels to get the word out.

Read more: Credit Cards Now: Everything You Need to Know From the CFPB’s Latest Report

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