The credit card industry is highly cyclical, and American consumers in particular have become increasingly depending on using credit cards as a source of liquidity. The rate at which consumers pay these credit cards are an important metric to financial institutions who use the inflows as liquidity. This year, consumers are exhibiting behavior that is quite rare, and rather surprising.
Traditionally, consumers tend to slow down their credit card payments during the summer. Given this year’s recession, one would have expected that trend to continue – but this year it seems that the trend did not hold. During this summer, credit reporting agency TransUnion has reported that cardholders making late payments on bank-issued cards like Visa and MasterCard fell to 1.1 percent for the July-to-September period, down from 1.17 percent in the prior quarter.
Amidst the housing crisis and rising unemployment, it is difficult to use this data as evidence towards an improving economy. It could be that the highest risk borrowers had credit lines frozen which would lessen their ability to spend on credit. Additionally, if spending in general was lower, there may be a correlation to fewer delinquencies.
As banks are worried about their loan portfolios and delinquency rates, this decline is quite significant. Delinquency rates historically rise in the third quarter while consumers are spending on summer vacations and back-to-school shopping. However, for the first time in a decade the delinquency rate dropped.
In a normal year, delinquency rates tend to seesaw, rising in the first and third quarters, and falling in the second quarters. This year, as consumers are focusing on paying down debt and striving to maintain good credit standing with their banks, a deviation is taking place. This may also be attributed to cash-based spending, while consumers are depending less on using credit cards as a source of liquidity.
Recessions change consumers – depending on the severity of the recession, consumers are changed for longer periods of time. As we enter holiday season, we will gain important clues into the consumer psyche. Last year, consumers cut back sharply during the financial crisis, and while this year’s forecast are not optimal, a rebound is expected. Early retail sales data is looking promising, but as we approach the all important barometer of Black Friday, markets will anxiously await the new data. Now, the key will be to see how much of this rebound is spent using cash, and how much is financed on credit cards.
