Banks’ alertness on credit card trends

Attentiveness glows going off among bank credit cards suggest that lenders in general and card lenders specifically will have to watch spending trends closely as the return of inflation continues to exert new pressure on purchasing patterns. As consumers lean more and more heavily on credit cards, the effects of marketing efforts hatched during the pandemic and before may produce unpleasant side effects. And the impact of credit limit increases intended to promote “top of wallet” usage, a continuing marketing practice especially in higher credit tiers, must be closely monitored in the current economic uncertainty. Consumers are leveraging their existing credit account lines more than ever, even as the cost of credit has accelerated. It is found that utilization of bank credit card lines has mostly returned to pre-pandemic levels, even as more and more card accounts have been approved in recent times. Many are seeking additional cards to expand credit they can draw on.

Credit card trends both macro and micro: Aggregate bank credit card balances have risen high year-over-year in recent times. Trends increasing balances and high account openings will continue for some time. Contention that high interest rates and higher-than-expected costs for goods and services are squeezing and driving more desire for credit. This compounds the impact of increasing levels of consumption. The higher costs that are with us today are going to be with us for quite a while, even as the inflation rate comes down. 

Card normalization: It has found that average account balances have returned to pre-pandemic levels in all credit tiers. That the percentage of accounts with unpaid balances, which had declined significantly during the pandemic, has bounced back and now slightly exceeds pre-pandemic levels even though the percentage of users whose balances revolve remains below pre-pandemic levels. 

Delinquency rates are rising: That overall portfolio risk has decreased as bank credit card issuers have trimmed the percentage of originations for below-prime consumers, while originations for super prime consumers has increased.However, there are risks already embedded in card portfolios as the result of past spending and card issuer marketing. Delinquency levels are rising, though they have not yet reached the levels seen during the 2000s.  Delinquencies continue to tick up on the card side. This is something we’ll be watching really closely.

During the pandemic and immediately afterward, many consumers saw their credit scores and their place in the hierarchy of credit tiers improve. This resulted in major improvement for many in 2020-2021. The good news is that many consumers are hanging onto their gains so far. It has not seen a wholesale reversion of consumers back to where they were. In part that’s because any change will be gradual and also because some people, gaining more experience with credit, were able to clean up their credit accounts. How scores will settle out remains to be seen.

Credit card lenders should watch for: While the average bank credit card balance has been growing, a related number has also been going up: the credit limit that issuers give each card holder, subject to adjustment.There are two behaviors that lenders must monitor. Unlike many other types of consumer credit, it’s increasingly common for people to have multiple credit card accounts simultaneously. Many cardholders tend to have a “top of wallet” choice that gets the majority of their buying volume. Other cards in their wallet may have significant credit lines attached to them, but those lines may rarely be tapped much normally. 

However, if a consumer suddenly begins drawing significantly on a secondary card’s credit line, that can be a warning sign that the consumer is getting in over their head, or that they’ve maxed out their usual go-to card. Need to watch whether dormant accounts that have suddenly awakened. To watch out for the creeping use of generous line increases given out in more buoyant times. Wise that many issuers use hefty credit line increases as a form of marketing. People like having a card on them with a big slug of credit attached. The psychological appeal of buying power can be strong. It’s a tried-and-true method of building card volume, according to Wise. That fat credit line and its card become the card used for special big purchase or that fancy night out, he explains.

It is observed that lenders need to keep an eye open for signs of credit card triage. This is when consumers get into difficulty making payments and begin choosing which card to pay down and which ones to roll over. Generally, they do their best to keep the one they consider indispensable in good standing. It is understanding this dynamic is becoming more important than ever for managing card portfolios.

The writer is Company Secretary, The City Bank Limited