Have Credit Card Companies Learned Nothing?
The facts are clear:
- The number of open credit card accounts topped 175 million in July, the highest number in 31 months.
- In May, credit card lending to subprime borrowers was almost 14 percent higher than it was when the recession led to a low point in 2010.
- Partly as a result of easier lending policies, the number of new credit cards issued in the first five months of this year reached 13.8 million, 10 percent up on the same period last year.
- Also between January and May 2012, the combined credit limits on new cards was $25.1 billion, up 16 percent on the same figure for the same period in 2011.
- In July 2011, balances on all credit cards were $48.9 billion. In the 12 months after that, they jumped by $2.6 billion, or 5.3 percent.
All of those data were derived from the August 2012 National Consumer Credit Trends Report, which was published by Equifax, one of the big-three credit bureaus.
Meanwhile, Collections & Credit Risk magazine, a trade journal for the debt industry, reported on Aug. 28 that "charge offs" (industry jargon for when credit card companies write debts off their books, and pass them for collection) increased for four of the six biggest card issuers in July.
Credit card debt -- misery to be avoided
All of this paints a pretty bleak picture of the future. Just a few years ago, unmanageable credit card debt bought stress, poverty and downright misery to millions of American families. After a quite brief period of relative sanity, during which households generally reduced their debt levels, are we really already willing to go down that road again, with greedy lenders serving up too much credit to subprime borrowers, whose chances of repaying in full are, by definition, less than good?Roughly a year ago, this writer posed a similar question (see Credit card lending: bring on the tripping goldfish). In that piece, he accused the executives who run credit card companies of having shorter memories than goldfish swimming in water laced with LSD.
Credit card companies' caseHow would card issuers respond to such charges? Well, they may well make four main points:
- The economy's getting better. As Equifax chief economist Amy Crews Cutts put it in a recent press release: "The economic recovery is increasing both demand for new credit cards and the supply of credit." So, as long as that recovery continues, most consumers should be able to stay on top of their credit card debt.
- Consumers are acting more responsibly, and can be trusted more. The August 2012 National Consumer Credit Trends Report found that consumers are both using less of their available credit, and increasing their payment ratios.
- That uptick in charge offs in July was tiny, and lower than would be normal at that time of year. The number of people paying their card bills late held steady, and experts expect charge offs at many issuers actually to decline in coming months, according to Collections & Credit Risk. Equifax, presumably using different data from the magazine, says that July charge-offs reached a 56-month low.
- Credit card companies have new and better IT tools that allow them to differentiate more accurately between subprime borrowers who once experienced temporary difficulties but are now creditworthy again, and those who are genuine deadbeats. In July, Equifax unveiled TIP, its latest such product, which, it claimed, meant: "Credit card issuers can now successfully identify prospective consumers with a higher propensity to borrow and repay…" In other words, credit card offers can be more accurately targeted at those who both want to borrow, and are able and willing to make payments.
Good points, but…You have to admit that some of those points are persuasive. So why does this commentator still worry so much about significant increases in credit card debt? Two reasons:
- Time and again, Wall Street (including the major card issuers) has proved that it can't escape its mindset of short-termism. All too often, it's hard to avoid the conclusion that the people who make lending policies have an eye on the current quarter's figures -- and their bonuses -- rather than on borrowers' long-term abilities to repay debt.
- For lenders, debt is a numbers game. They know that x borrowers are likely to default, and they build those risks into their computer models, making sure as best they can that the credit card rates they set, along with their other revenues, protect their profits from their charge-off expenses. Contrast that with the experiences of individual consumers who find themselves unable to stay on top of their debts. They face personal tragedies that usually involve real hardship, often for whole families.
Credit cards can be goodThere's absolutely nothing wrong with modest levels of credit card debt, providing borrowers' obligations remain manageable. indeed, it's hard to see how the economy can fully recover until prosperous and secure Americans again become more comfortable with credit. And it's undeniable that, in general, a credit card offers more consumer protections and benefits than any other form of payment. But, at least for now, shouldn't plastic be reserved for those who have proved they can handle it well?
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