Credit cards help consumers get through their everyday needs. No matter where you are on the economic spectrum, you can find a credit card designed to help balance your budget. In addition, if you carry a FICO Score north of 720, are employed, and live within your means, the credit card can create opportunities through reward points and help control the use of cash.
On the other hand, if you have a weak credit score and manage your expenses month-to-month, the card can be a saving grace to help you manage the daily needs of life. At the end of the day, credit cards allow consumers to manage their cash flow, which keeps 130 million households afloat in the United States.
Credit card issuers manage a relatively simple business model. Although the model has plenty of analytics to support it, at the end of the day, there is an issuer responsibility to keep their cardholders out of trouble by managing acquisitions to an “ability to repay” standard and being somewhat forgiving when life events like unemployment, healthcare, and unbalanced household budgets disrupt the consumer responsibility to repay their debts.
Right now, credit card metrics look great. But, as discussed in a recent Mercator report, titled Credit Card Risk, Protracted Pandemic, and the Household Budget, the metrics can quickly shift, at a time when credit card issuers are softening their underwriting standards, increasing their reward incentives, and getting ready to cash in their 2022 bonuses for operational performance.
But, spend 10 minutes looking at the recent WSJ article titled U.S. Inflation Reaches Fastest Pace since 1982.
U.S. inflation closed out 2021 at its highest level since 1982 as robust consumer demand exacerbated pandemic-related supply shortages.
The Labor Department said the consumer-price index—which measures what consumers pay for goods and services—rose 7% in December from the same month a year ago, up from 6.8% in November. That was the fastest pace since 1982 and marked the third straight month in which inflation exceeded 6%.
“There’s still a lot of scarcity in the economy. Consumers and businesses are in great financial shape. They’re willing to pay up for more goods, more services, and more labor,” said Sarah House, director and senior economist at Wells Fargo, pointing to reasons for the “blistering pace of inflation.”
We’re not talking about disruptive inflation, as seen in Venezuela, where a dozen eggs cost $150 as inflation hit 1,200%, but 7% is wicked in a stable market like Canada, the U.K., or the United States. And for those on the economic fringes that will not have the opportunity to increase their budget at the same pace, it will not take long for household budgets to revolve more around their credit card debt than ever before.
For credit card issuers, there is a short-term opportunity. More debt will revolve, and more interest will accrue. But in a consumer finance business that relies on transactions rather than overloaded consumers, that becomes a castle built upon sand.
As we enter 2022, credit card issuers need to keep a keen eye on inflation and start to build strategies to counteract charge-off issues in Q32022. And if they do not begin to react before the delinquency bubble shifts, they will be dealing with the risk well into 2023.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group