Just like the economy, credit card issuers are sending mixed signals about consumer debt. I wanted to share my opinions and read the tea leaves this month.
Equifax is reporting credit cards are being issued at a faster rate this year. “More than 18 million new bankcards have been originated between January-June 2011. While this total represents a 3-year high for this timeframe, it is still considerably lower than the more than 34 million new bankcards originated during the pre-recession January-June 2007 timeframe.”
Most interesting is the mix of the cards. “Continuing a trend reflected by January-May 2011 data, the number of bankcard originations for subprime* borrowers exhibits a sustained increase over 2010 levels, and now accounts for more than 31 percent of all bankcard originations. With 5.4 million new subprime bankcard originations during January-June 2011, the total is now up 64 percent over January-June 2010 levels.”
It seems clear the issuing part of the banks want to be enthusiastic about the consumers ability to take on new debt and the banks can get back to making money with sub-prime borrowers.
More cards may have been issued but consumers continue to not take to available credit and as I’ve covered recently, the levels of debt consumers is carrying is declining. See Consumer Debt Drops to 2004 and Earlier Levels.
Normally an increase in issuance and the ability to borrow would create a clear sign of an increase demand in about 18 months. But this economy is probably going to cut that off at the knees.
As consumers remain uncertain about the economy in the near future, they will continues to shed debt or at the very least, not increase dramatically.
It’s not the availability of the cards that creates the demand for debt relief services it’s more important to have high consumer confidence and no immediate fear about the individuals ability to repay. Bottom line, confidence and capacity dictate the hyperbolic discounting that drives enrolling in debt relief services but for that to happen the general outlook needs to be up.
The outlook for the economy right now is not positive. In fact while banks are shoveling out new cards, collection managers are worried what the near future may bring.
FICO’s latest quarterly survey of bank risk professionals offered a decidedly pessimistic outlook, reversing the growing optimism seen in late 2010 and early 2011.
When bankers were asked their opinions about the next six months, a large number of survey respondents indicated that they expect delinquencies to rise on auto loans, credit cards and student loans. Auto lending had been a bright spot in FICO’s previous quarterly surveys, but in the latest survey, 30 percent of respondents indicated that they expect auto delinquencies to rise, while 21 percent expected them to fall. For credit cards, 40 percent expected delinquencies to rise and 23 percent expected them to fall. And for student loans, 48 percent of respondents expected delinquencies to rise and 13 percent expected them to fall.
A large plurality of survey respondents (50 percent) expected credit card balances to increase over the next six months. The increases are likely to be driven by higher spending among some consumers and smaller monthly payments from others. However, in a sign that bankers aren’t optimistic about the ability of consumers to power the economic recovery, 64 percent of respondents expected credit card usage to remain below pre-recession levels for at least five more years. – Source
I would expect balance increases to be the function of making ends meet rather than pushed by manageable and increasing consumption.
Even if consumers believe the economy is growing brightly and take on new credit and then hit the wall, those that enroll in a debt relief solution that takes longer than a couple of years are likely to drop out. The likelihood at this point is the economy will stutter and consumers will turn to other solutions as their confidence and capacity to repay stumble again.
My outlook for the debt relief industry remains guarded and certainly would not warrant any large anticipatory expansion or long term commitments. It’s time to still stay hunkered down.
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