A little over a week ago, when looking at the latest consumer credit data from the Federal Reserve, we were shocked to learn that in March, credit card debt soared by a record $52.4 billion, the biggest monthly increase on record and more than double the expected change.
AKA, the American consumer is approaching maximum credit saturation.
While the Federal Reserve and the Trump administration plow trillions of dollars into corporate America, buying investment-grade bonds and rocketing the stock market to new highs, there’s a much different story playing out of economic hardships for the everyday American.
There’s a massive pullback by credit card issuers at the moment, reducing credit limits and canceling accounts of consumers.
CompareCards’ new survey shows the economic fallout from the virus-induced recession is far from over. About 25% of Americans with credit cards had an account involuntarily canceled between mid-May to mid-July, while 33% said card companies slashed their credit limit.
About 70 million people – more than one-third of credit cardholders – said they involuntarily had a credit limit reduced or a credit card account closed altogether in a 60-day period stretching from mid-May to mid-July.
The report is a clear sign that credit card issuers are still closing cards and reducing credit limits on cardholders in huge numbers, months after an April 2020 CompareCards survey showed that nearly 50 million cardholders had a card closed or credit limit reduced in the first month in which the coronavirus pandemic took hold of the country. – CompareCards
Matt Schulz, the chief industry analyst at CompareCards, told Yahoo Money that “an awful lot of Americans had one of their financial security nets taken out from under them in one of the most difficult economic times in American history.”
The pullback by credit card companies was last seen during the Great Recession when about 16% of cardholders saw limits reduced and accounts involuntarily closed.
“This is, in a lot of ways, a much bigger issue today than it was in the Great Recession,” Schulz said. “It makes sense that banks are taking an even harder line with lending because there’s so much that they don’t know, and they’re so nervous about risk.”
The key takeaway from the survey is that card closures and credit limit reductions continue through summer, even though the Trump administration promotes a ‘rocket ship recovery’ in the economy.
Millennial generation have had the most credit limits slashed and cards closed.
Even folks making over $100,000 have seen limits reduced and cards closed.
Most of the credit limit reductions weren’t huge.
This all suggest that credit card companies don’t trust consumers and are preparing for the next downturn that will pressure households once more. With a fiscal cliff looming, and if the next round of stimulus isn’t passed quickly, another credit crunch for the bottom 90% of Americans could be just ahead.
Zerohedge readers who follow our monthly consumer credit updates already knew, aggregate household debt balances jumped in 4Q18. As of late December, total household indebtedness was at a staggering $13.54 trillion, $32 billion higher than 3Q18.
More troubling is that 37 million Americans had a 90-day delinquent strike added to their credit report last quarter, an increase of two million from the fourth quarter of 2017. These 37 million delinquent accounts held roughly $68 billion in debt, or roughly the market cap of BlackRock, Inc.
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New evidence this week points to a further deterioration in consumer creditworthiness.
To understand the American credit card debt crisis, real estate data company Clever surveyed 1,000 credit card users earlier this month.
Using Consumer Financial Protection credit card complaint data and other forms of consumer metrics, the company was able to gain tremendous insight into the average American’s purchasing habits, dependence on credit cards, and feelings about their debt situation.
The survey found that 47% of Americans have a monthly balance on their credit card. About 30% of respondents with credit card debt believe they’ll extinguish the debt this year, leading many of the respondents stuck in an endless debt cycle.
Fifty-six percent of the respondents say they’ve had credit card debt for more than a year. About 20% estimate their debt will be paid off by 2022, while 8% were unsure about a timeline.
“It’s a big issue,” Ted Rossman, credit industry expert for CreditCards.com, tells CNBC. With credit card APR soaring to about 17.64%, a new high, the interest accrued on monthly balances can quickly add up and trap unsuspecting consumers with insurmountable debt.
The U.S. recovery has been the slowest since WWII. Consumers have been stuck in the gig-economy with low wage and skill jobs. Their wages have not been able to outpace rapid inflation in groceries and rent. So many have resorted to credit cards to supplement their daily expenses. This is especially prevalent with lower-income families, defined here as those earning less than $50,000 a year. Buying groceries” ranked as the top expense that racked up people’s balances, the survey said.
About 28% of respondents say they’re fully dependent on credit cards to pay rent and utilities.
Emergency expenses were also a major contributor to credit card balances. About 30% cite medical bills and 40% say automobile repairs have moved their balances higher.
Surprisingly, there is some good news. Sixty-two percent of millennials indicate they pay their balance every month. That’s compared to just 48% of Generation X and Baby Boomers.
Credit cards are an integral part of developing credit and proving creditworthiness. Multiple reports show the consumer is on the cusp of a dangerous deleveraging, an ominous sign that the credit cycle has likely turned. Winter is here.
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