Financial Inclusion

Credit Card Use Among Low Credit Score Shoppers On The Rise

According to new data from the New York Federal Reserve, credit card debt is enjoying a resurgence even among those with low credit scores.

In Q2 alone, household debt climbed by $35 billion to $12.3 trillion, according to the NY Fed’s last quarterly report on household debt. The twin drivers of that debt upswing tend to be auto loans and credit cards.

The auto loan picture is a continuation of a trend – car loans have been on an upswing for the last six years. Credit cards, however, had been harder hit and slower to recover since the Great Recession. But since 2014 the card spending habits of the American people have shifted back toward favoring debt, and card balances have risen an accompanying $70 billion.

During the Great Recession and the early recovery, Americans took a rather dim view of debt, which fell by $1.5 trillion. However, since 2013 that number has been steadily rising – student loan balances led out the trend, followed by mortgages and credit cards.

High score cardholders – about 88 percent of high credit score owners also have credit cards – has remained fairly constant over the last decade.

Middle and lower score households, on the other hand, had been effectively locked out of credit markets, as waves of various defaults swept the system during the recession and credit crunch that followed.

The report “highlights a positive ongoing trend in household debt,” said Donghoon Lee, a New York Fed economist. “Delinquency rates continue to improve, even as credit has become more widely available.”

At this point, only 1 percent of card balances are seriously delinquent, or 90-180 days past due. Very derogatory balances written off by banks are also at a historically low 6.2 percent.  This improvement is consistent with other observable improvements. Roughly 1.8 percent of mortgage balances fell into serious delinquency during Q2, the lowest level since 2007. Foreclosures on credit reports have also hit an 18-year low.

The rather unfortunate exception to the rule is student loans, which has double-digit delinquency of 11 percent.



The pressure on banks to modernize their payments capabilities to support initiatives such as ISO 20022 and instant/real time payments has been exacerbated by the emergence of COVID-19 and the compelling need to quickly scale operations due to the rapid growth of contactless payments, and subsequent increase in digitization. Given this new normal, the need for agility and optimization across the payments processing value chain is imperative.

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