People aren’t paying their credit cards and more are being shutdown

Naomi
Baker/Getty Images

• Credit-card delinquencies, application rejections, and
  involuntary account closures are all on the upswing, according to
  a report from the Federal Reserve Bank of New York.
• The Fed says these developments are “potentially concerning”
  given the strength of the economy and comparatively low interest
  rates.
• The trends likely indicate credit-card companies issued debt
  too freely in the preceding years.
• But they could also signal that lenders are bracing for an
  economic downturn and paring back risk accordingly. 

The economy is robust, unemployment is sitting at 3.7% — its
lowest mark
in nearly half a century — and interest rates, though moving
upward, are still relatively low.

So why are credit-card delinquencies, application rejections, and
involuntary account closures all on the upswing? 

That’s what the
Federal Reserve Bank of New York would like to know. 

The
Fed released the results this week of its Credit Access
Survey — a quarterly report on US borrowers — and it surfaced a
couple alarming trends that suggest credit-card issuers are
getting skittish and paring back risk: Both credit-card rejection
rates and involuntary account closures are on the rise.  

Rejection rates for credit-card applicants came in at 20.8% in
the October survey, up from the 14.4% a year ago, while the
rejection rate for credit-limit increases ticked up to 31.7%,
compared with 24.9% a year ago. 

Meanwhile, the proportion of respondents who had an account shut
down by a lender reached its highest level since the Fed launched
the Credit Access Survey in 2013. In October, 7.2% of surveyed
consumers reported having an account involuntarily shutdown in
the previous 12 months, up from 5.7% last year and 4.2% in
2016. 

Most of these account shutdowns are credit card or retail store
cards.

A separate New York Fed report released last
month — the Quarterly Report on Household Debt and Credit —
produced a similar finding. The report, which mines Equifax
consumer credit reports for data, showed an uptick in the past
year and a half in account closures, again primarily from credit
cards. 

Read more:
Credit-card super users are searching for answers amid a string
of shutdowns from Chase, as billions in costs on lavish rewards
pile up

Why are credit-card issuers rejecting more customers and
shuttering more accounts? 

Federal Reserve Bank of New
York

One reason is that they may be spooked by the increasing number
of people who aren’t paying off their cards. Credit-card
delinquency rates began to climb sharply toward the end of 2016,
a trend that
hasn’t reversed in 2018, according to Fed data.

Given the healthy state of the economy and low unemployment, an
increase in delinquencies is “potentially concerning,” according
to the Fed, and likely signals that card companies issued debt
too freely and to less-trustworthy borrowers in preceding years
and are now trying to reverse course. 

That’s consistent with the fact that credit-card issuance
inflated substantially starting in 2013 — credit-card balances
are up from $670 billion in Q3 of 2013 to $844 billion in Q3 of
2018 — and that the sharpest increase in delinquencies is among
borrowers with lower credit scores, according to Fed data.
However, the increase in delinquencies among higher credit-score
brackets suggests loose lending wasn’t limited to subprime
borrowers, the Fed points out.

Federal Reserve Bank of New
York

The uptick in delinquencies, rejections, and account closures
could also be symptoms of a much darker malady: early cracks in a
weakening economy. 

When people lose their jobs or are struggling financially,
credit cards tend to be one of the first bills they stop paying,
as compared with secured loans for a home or a car in which
people risk losing those crucial assets.

If the economy is turning, card issuers have a giant incentive to
get ahead of the trend, especially amid the environment of
climbing interest rates, which potentially makes life even
more difficult for cash-strapped cardholders.

“Credit-card lenders are tightening up the credit approval
process as the economic clouds are darkening for our economy.
They see a downturn coming, so, in anticipation of that trend,
are reducing their risk exposure in the unsecured card space,”
Robert Hammer, CEO of payments consulting firm R.K. Hammer, told
Business Insider when asked about the latest Fed report.

Lenders are already facing a tough outlook heading into 2019 with
a saturated US market and declining return on assets, according
to Brian Riley, the director of Mercator Advisory Group’s
credit-card consulting business.

He predicts growth will slow next year for card issuers as they
brace for higher delinquencies among the country’s 470 million
cardholders.  

It’s too early to say whether the economy will dip into recession
or whether delinquencies, rejections, and involuntary account
closures will continue to streak higher, but the Fed will be
keeping a close eye on these trends, saying in its report that it
plans to “continue investigating these issues.”