U.S. Credit Card Charge-Offs Hit Seven-Year High

Credit card issuers reported a 3.82% charge-off rate on credit cards in the first quarter of 2019 — the highest percentage of written-off accounts in almost seven years. In addition, accounts that are 30 days past due increased for each of the seven largest card issuers, suggesting the charge-off trend will continue.

Banks are nowhere near panic, nor should they be. Data from the St. Louis Federal Reserve shows that delinquencies are still near historic lows, well below the 6.77% peak in the second quarter of 2009. For perspective, the Fed data shows that the delinquency rate on credit card loans for all commercial banks fell below the 3% mark in Q2 2012 and has not topped 3% since then. From 1991 to 2012, the delinquency rate was never below 3%.

The post-recession credit-tightening measures have clearly worked, but financial markets are aware of how bad trends can spiral — even a small steady rise is cause for concern.

Across The Board

Not all card issuers saw a peak default percentage in 2019, but issuers across the board showed a significant increase since 2016.

Synchrony Financial SYF and Capital One Financial Corp. COF had the highest rates at 6.1% and 5%, respectively. Bank of America Corp BAC, Discover Financial Services DFS, Wells Fargo & Co WFC, JPMorgan Chase & Co. JPM, Citigroup Inc C and U.S. Bancorp USB have all seen steady increases since early 2016. Even the typically reliable American Express Company AXP saw write-off rates increase from 1.5% in Q2 2016 to 2.3% in Q1 2019.

Credit card losses are increasing as a percentage of overall loan write-offs. Four of every five charge-offs are related to credit cards, compared to two of every three charge-offs in Q1 2016. Bloomberg noted that America's four largest banks wrote off nearly $4 billion in uncollected credit card debt in Q1 2019 compared to $656 million in bad debt from all other consumer loan types.

How Risky Are You?

Competition among credit-card companies is fierce, increasing the incentive to stretch qualification boundaries. Banks are also having a tougher time assessing risk. Research from the Federal Reserve shows signs of "grade inflation" among credit scores. A credit score of 660 is a typical boundary for subprime lending, but the risk associated with that boundary is not the same as it was ten years ago.

As banks issue more credit cards to marginal borrowers — whether accidentally or on purpose — it's reasonable that credit card charge-offs would increase. However, the banks aren't in charge of how people use the credit cards that they issue. Individuals are responsible for their own credit usage, whether they are prime, marginal, or just hanging on by their fingernails.

You know your own risks and limits with credit, and if not, you should.

Credit cards can be an effective way to manage money, improve credit, earn points, and travel with perks if used the right way. Benzinga's personal finance staff provides tips on using credit cards effectively.

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