Currently, people in the U.S. are using their credit cards more than ever. While that can be a good thing if used correctly, this is bad news. New red flags are jumping in the credit card industry. The off-charge rate is growing and it’s higher than it’s been in seven years. This means people aren’t paying off the credit they’re borrowing.
The off-charge rate is the debt that loan companies don’t believe they’ll ever get back. It sits on their credit report, unpaid, and often falls off. The amount of debt that is considered charge-off rate grew another 3.82%. This is the highest number since 2012 when the economy was really taking a hit. This is due to data pulled together by Bloomberg Intelligence.
It’s not just the charge-off rate that’s growing. The number of loans considered 30-days past due also grew. This increase was seen across all seven of the largest credit card issuers in the U.S. That means the potential for the charge-off rate to grow is very high. There’s one major reason why this is happening.
The Great Recession and Credit Card Debt
A decade ago, we saw the economy collapse into what’s called The Great Recession. Good, reliable work became scarce. People were losing their homes in large number. In order to survive, credit cards became America’s saving grace. Just whip out the plastic and worry about it later! Yet, the economic crisis pushed on for many more years.
Only now is the economy starting to come back. So, what happened with the credit card debt we accumulated? Well, it stayed on our credit. We saw a degradation of our credit quality in ways we’ve never seen before. Considered ‘negative credit events’, people just held on. They declared bankruptcy. Their credit suffered, but they made it through.
Lessons Not Learned
We’re now entering a time when the economy is mostly recovered. Unemployment is down to historic lows. Wages are rising and the stock market is booming to record highs. So, why is the charge-off rate growing again? The answer is, we didn’t learn our lesson from The Great Recession. In fact, it taught us a bad lesson.
All the bad credit people accumulated during tough times is starting to fall off their credit reports. Usually a bad report will fall off in seven years. That means bankruptcies and other credit borrowed but not paid back has fallen off their reports. And, instead of doing things the right way, people are borrowing more than ever.
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Either they assumed they could afford the new credit or they know it will just fall off in seven years. It’s unknown what impact this will have on the future economy.
“Certainly, this has been one of the longest recoveries, so, in general, we have been contracting credit policy at the margin and tightening,” Discover CEO Roger Hochschild said in an interview. Hochschild said his company has been closing inactive accounts and slowing down the number and size of credit-line increases for both new and existing customers.
“If you think about lending products, there are always people who want to take your money,” Hochschild said. “You’re going for people who have many choices — they have existing cards, they could get any card they want. So, our job is to make sure those are the ones we attract to Discover.”
