US banks, already under pressure from slower loan growth and low interest rates, could be facing yet another challenge as a rising number of Americans fall behind on their credit card payments.
Several large US banks and credit card companies, including Capital One Financial Corp and JPMorgan Chase & Co, reported a rise in credit card delinquency rates for August, the second consecutive rise after falling for four months.
While the rates remain significantly below the levels hit during the 2008-2009 financial crisis, rising delinquencies could result in higher loan losses for lenders.
“A noticeable rise in delinquency rates — even from very low levels — is worth paying attention to,” said Andrew Haughwout, senior vice-president at the New York Federal Reserve.
JPMorgan’s credit card delinquencies rose 1.16 per cent in August from 1.15 per cent in July, while Capital One reported a delinquency rate of 3.97 per cent, up from 3.81 per cent in July.
Discover Financial Services’ monthly credit card delinquency rate rose to 2.1 per cent in August versus 2 per cent in July.
Overall, seasonally-adjusted credit card delinquency rates for US banks rose to 2.47 per cent in the second quarter from 2.20 per cent a year earlier, according to New York Fed data.
Delinquency rates surged during the financial crisis as the economy crumpled and thousands of people lost their jobs. In the aftermath of the crisis, lenders tightened their standards to curb losses from non-performing loans.
With the United States now approaching full employment, lenders are more willing to take risks and extend loans and cards to people with low credit scores.
“We have seen some loosening of standards on card originations: low-credit-score individuals getting credit cards or extended limits, which allow them to borrow more,” Haughwout said.
US household debt levels are hovering near record highs, after having surpassed their pre-crisis peak earlier this year, as Americans continue to extend their credit card as well as mortgage and auto debt repayments.
There has been a notable increase in the transition to serious delinquency levels primarily among borrowers with credit scores of below 660, the NY Fed said in a blogpost.
“It is not clear yet what effect it will have on the future. But historically it has been the case that once these delinquency rates start to rise, they can continue to rise,” Haughwout said.
Along with lenders willing to take on more risks, stagnant wage growth is also to blame for higher credit card delinquencies.