Consumer Finance

$8B In Bad Credit Card Debt Write-Offs Worry US Banks

With the rate of delinquent credit card holders slowly rising, some banks are scaling back on opening new accounts.

Last year, it was reported that credit card debt had surpassed the $1 trillion mark in the U.S., becoming the third consumer lending category that has surpassed $1 trillion in debt in the last few years. Auto loans was the first category first to reach that mark, while student loan debt was second.

And according to the Financial Times, while the rate of delinquent credit card holders is still low, the numbers have been slowly rising since 2015. Quarterly write-offs of bad credit card debt hit their high at nearly $19 billion in the first quarter of 2010 and fell to $5 billion in 2015. But in the last three years they have gone up to more than $8 billion.

In addition, last month the Federal Reserve’s Board of Governors’ annual report of credit card banks’ profitability showed a return on assets falling in 2017 for the fourth year in a row. In fact, at 3.4 percent, it is one-third lower than it was in 2013.

The result: The number of open card accounts being offered has slowed to the low single digits in the last few quarters, and more large U.S. banks are getting stricter with their standards for approval.

Experts say that part of the issue is that merchants are getting tougher with banks, insisting that they lower their fees. For example, Costco moved its branded cards to Citi from American Express after a 16-year relationship.

“The banks are giving more to the merchants,” said Jason Goldberg, an analyst at Barclays.

Fee revenue is also being impacted by generous rewards offers aimed at attracting new customers, with millennials often switching between cards to get the most out of rewards and interest rates.

And the Credit Card Accountability Responsibility and Disclosure (CARD) act of 2009 has also played a role in lowering revenue, since it prohibits many punitive fees and limits the banks’ ability to raise customers’ rates.

“Issuers lost their ability to dynamically re-price and their ability to generate fee income,” said Brian Riley of Mercator Advisory Group.

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