Surge of credit card defaults ahead?

Americans owe an all-time high of nearly $1 trillion on their credit cards, setting the stage for a possible surge in consumer delinquencies and defaults.

“There are nascent signs of trouble brewing,” investment firm Glenmede Trust Co. warned in an April research note. “An ever–larger share of credit balances have transitioned to early stages of delinquency, consistent with past periods of recession.”

Lenders are feeling the losses, including McLean-based Capital One Financial Corp. The credit card giant reported a 60% drop in profits to $960 million in the first quarter from the same period a year ago, largely due to customers defaulting on their credit cards and car loan debts.

Like other large banks, Capital One is pumping up provisions for credit losses, as it set aside $2.8 billion in the first quarter, up from $677 million in the year-earlier period.

Not only are more customers at least 30 days late on their payments (at Capital One, 3.66% of total U.S. card holders in the first quarter were late, up from 2.32% a year ago), but companies are racking up more for write-offs — debts they never expect to collect (4.04% of total loans in the first quarter, up from 2.12% a year ago at Capital One).    

Capital One CEO Richard Fairbank told analysts in April that he “feels very good about the business,” given that defaults remain low by historic standards. However, he stated, profits could take another hit this year as rising delinquencies segue into actual losses.

Americans are piling on debt in the face of high inflation and rising interest rates.

Total credit card debt surged $61 billion at the end of last year to a record $986 billion and stayed at that level through the first quarter of this year, surpassing the pre-pandemic high of $927 billion, according to the Federal Reserve Bank of New York. Auto loan balances increased by $10 billion in the first quarter. 

Consumers typically pay down debt in January after the holidays, but not this year.

“Rising living costs and stagnating wages caused savings to decline, creating excess demand for credit card debt,” financial analyst Harrison Schwartz writes in a March report on financial news site “Seeking Alpha.”

“Initially, this situation was great for Capital One as demand for its products rose,” Schwartz continues. “However, the rapid decline in consumer sentiment and savings over the past year has caused default rates and expected loan losses to increase.”

In all, 46% of U.S. cardholders carry balances from month to month, up from 39% last year, according to January data, the most recent, from financial information provider Bankrate.com.

The average credit card balance per consumer this year is $5,733, up 14.4% from a year earlier, according to credit reporting agency TransUnion.

“We’re seeing three big trends with respect to credit card debt,” says Ted Rossman, senior industry analyst with Bankrate.com. “More people are carrying more debt and that debt costs more than ever (an average APR of 20.37%), the highest since we started measuring in 1985.”

Also, it’s the first time in the central bank’s 20-year report on household debt that credit balances failed to fall during the first quarter, which “could foreshadow trouble for later in the year,” Rossman says.

Interest rates likely will remain high for the foreseeable future, he adds, saying, “My top tip would be to sign up for a 0% balance transfer credit card (still widely available).”

The economic story facing consumers is straightforward, Schwartz says. “Rising living costs and excessive consumer spending on credit have caused many households to suffer significant declines in stability.”