While financial experts continue to preach good credit and credit card spending, some not-so-good news in this regard has been released as of late. Turns out, bad debt is on the rise, with a current jump that hit a seven-year high recently.
As per Bloomberg Intelligence, the first quarter of 2019 saw an increase of 3.82% as it relates to the “charge-off rate” (percentage of loans organizations will never collect on), which is the highest rise we’ve seen in this rate since Q2 of 2012. Loans that were 30 days past their due date, potentially future charge-offs, rose within all seven of America’s largest credit card issuers.
As per the CEO of Capital One (which happens to be the third-largest credit card issuer in the U.S.), Richard Fairbank, there’s a ‘degradation’ when it comes to quality of credit for certain clients, where those with negative credit occurrences during financial crisis are seeing those issues vanish from the credit reports as of late; meaning the data may not tell a full picture around a person’s history with credit.
Capital One recently reported that its 2019 Q1 United States card charge-off rate increased to just over 5% from a previous 4.64% nearing the end of last year. Meanwhile, Discover’s charge-off rate rose to 3.5% from 3.23% during the last fiscal quarter.
These recent red flags are building from January’s developments, where 2018 Q4 results revealed charge-off rates that were the lowest in about 10 years. Competition to gain access to high-quality clients is at its highest, which has many card issuers focused on offering rewards and spending more on marketing to gain access to this group within the market. Having said that, increased wariness regarding a possible rise when it comes to bad debt also has many of them tightening their underwriting guidelines to ensure they had out cards to people that will keep spending, but also keep the payments flowing as well.
Scott Hastings is a CPA with over a decade experience in finance. He started his career in audit with PwC and is excited to bring that knowledge to RM Credit Cards.