Credit Cards Show a Steep Increase in Usage By the End of 2023, Yet a Risky Scenario Awaits in 2024
In the world of credit cards, the year 2024 promises a mix of growth and challenges for issuers.
Small issuers are bracing for an 8.50% charge-off rate, significantly higher than top-tier banks' 3.57%. This trend suggests a higher risk of consumers defaulting on their payments. Major banks like Citigroup and JPMorgan Chase have also reported declines in deposits, with Citigroup seeing a 5% year-over-year drop in Q3 of 2023, and JPMorgan Chase reporting a 3% decline in the same period.
The increased spending on credit cards and buy now, pay later (BNPL) loans, even as personal savings dwindle, could be a cause for concern. This trend, according to The Wall Street Journal, could potentially mark the start of significant losses for credit card issuers in 2024.
However, there are signs of hope. The growth in credit card spending and loan balances could also mean that credit card portfolio managers may meet or exceed their performance goals in terms of volume. Javelin predicts that revolving credit card debt will continue to grow due to consumer distress, but this could also indicate a steady demand for credit products.
The outlook is one of cautious optimism. Usage and spending growth combined with improving credit performance point towards sustained growth rather than significant losses for issuers at present. However, elevated costs and interest rates introduce risks that may affect profitability and credit risk if economic conditions worsen.
Credit card interest rates remain historically high, increasing the cost of borrowing for consumers who carry balances and potentially dampening demand or increasing default risk for some segments. Moreover, swipe fees charged to retailers by card networks and issuers are at record highs, totaling $187.2 billion in 2024. This amplifies inflationary pressures on consumer prices and could provoke regulatory scrutiny or shifts in market dynamics.
Continued regulatory scrutiny of late fees could put further pressure on card issuers' margins. In Q3 of 2023, credit card spending increased at several major banks, including JPMorgan Chase (9%), Wells Fargo (15%), and Citigroup (2%). However, this growth is counterbalanced by the rising unpaid balances on credit cards, which could potentially lead to delinquencies.
The total delinquency rate reached 2.98%, marking the seventh straight quarterly increase. This trend, if continued, could lead to a rise in charge-offs, with losses expected to rise significantly, with the charge-off rate potentially climbing from 3.49% to 6% in 2024.
The financial strain is emerging as signs of decline in deposits, indicating that consumers are dipping into their savings to stay afloat. Credit card loans rose nearly 16% at JPMorgan, 14% at Wells Fargo, and 11% at Citigroup in Q3 of 2023.
The message for consumers and businesses is clear: spend less and save more. Credit card profitability is likely to decline in 2024 due to tighter lending standards and more selective card issuance. The question now is whether 2024 will continue the growth seen in 2023 or mark the start of significant losses for credit card issuers.
Sources:
- Javelin Strategy & Research
- The Nilson Report
- Federal Reserve Bank of New York
- The Wall Street Journal
- TransUnion
Businesses or individuals focusing on personal-finance may face challenges in the coming year as credit card interest rates remain high, potentially dampening demand or increasing default risk. The growth in credit card spending and loan balances, while signaling a steady demand for credit products, could also lead to an increase in delinquencies and higher charge-off rates, impacting the profitability of financial institutions in the field of finance.
