NEW YORK–What to make of consumers and their credit? For every negative cited by some analysts, there are positives cited by others, a new report makes clear.
“Many measures of credit performance for things such as credit-card or auto loans are moving in the wrong direction, like the percentage of payments that are late, or the share of debts being written off,” noted the New York Times. “For example, in Discover Financial Services’ latest quarterly report, the lender guided toward a jump in net charge-offs from 3.42% in 2023 to a range of 4.9% to 5.3% in 2024.
“At the same time, though, there are many other indicators suggesting strong consumer health, such as buoyant spending numbers. And the biggest banks, with detailed insight into the day-to-day finances of millions of people, haven’t sounded alarm bells, either,” the report continued.
Is there a way to reconcile the two viewpoints?
A Reconciliation?
So, is there a way to reconcile all of this? According to the analysis, “Digging into recent reports by consumer lenders suggests that there is. Higher net-charge offs in 2024 may in part be a reflection of a unique growth in credit that happened in the aftermath of the Covid-19 pandemic. During the pandemic, some Americans saw improved finances. They spent less, received government stimulus and enjoyed forbearance on some payments. Measures of creditworthiness improved,” the Times stated.
When the pandemic ended, lenders, including credit unions, tapped into the surge of potential spending, including by issuing credit cards to more than 12 million new cardholders, the report noted. But when inflation struck in 2022, the Fed began raising rates and adjustable-rate loans got expensive, which goosed late payments and loss rates.
What is Ultimately Ahead?
What will ultimately happen with many loan portfolios? Analysts told the Times it may end up being as much “about lenders as it is about consumers. If the population of people who got loans or cards, and used them heavily, was different than it was in past years, then just comparing today’s loss rates to prepandemic isn’t going to give a very clean indicator of overall consumer health.
“It also suggests that 2024 could represent a nadir for credit that lasts a relatively short amount of time,” the analysis continued. “Consumers might just keep buying pricey old bottles or vinyl records for a while longer.”
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