Credit Card Risk

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Excessive subprime mortgage issuances were a fundamental cause of the 2008 economic crisis. Could excessive subprime credit card issuances lead us into another recession?

Reuters reported that while big banks do not give clear figures on their profits from credit cards issued, “Executives say cards are among the most profitable of any business with returns on equity of as much as 25%, about twice banks’ recent overall return.” Banks do report on the average amount of credit card loans they’ve issued in any given quarter.

Loan amounts have catapulted in the past quarter….

 

This boom in credit card loans is believed to largely be driven by issuances to individuals with credit scores less than 620 or subprime borrowers. More than twenty million credit cards were issued to subprime borrowers in 2015, up 20% from 2014 and 56% from 2013 according to Equifax.

Missed payments on newly issued credit cards are higher than on older cards according to Trans Union. Nearly 3% of outstanding balances on credit cards issued in 2015 were at least 90 days behind on payments six months after they were originated. That compares with 2.2% for cards that were given out in 2014 and 1.5% for cards in 2013. Highlighting this problem is the rate of missed payments in states with large oil or energy sectors. The share of card balances that were at least 90 days past due increased 12% in Oklahoma, 10% in Texas and 20% in Wyoming from the prior year third quarter.

After the 2008 market crash there was a sharp decline in the number of credit cards being issued by the big banks. People were declining to open new accounts and 50 million accounts were closed as well. Almost 75% of the accounts closed were by individuals with poor credit.

In 2001 new cards issued to subprime borrowers started to tick back up. Today just over 50% of all subprime borrowers hold at least one credit card. How many subprime borrowers had at least one credit card in 2008? 59% was the total just before the 2008 crisis hit. As we celebrate Halloween tonight Is the buildup of subprime credit card issuances a spooky similarity to the 2008 subprime mortgage crisis?

Interested in talking more about the consumer credit marketplace?

Contact Smith Hanley Associates Executive Recruiter, Nancy Darian who leads our credit practice.  You can reach her at ndarian@smithhanley.com or 312-589-7582.

 

 


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