WASHINGTON—A new forecast is projecting that overdrafts will be regulated under rules currently applied to extending credit, while also predicting that consumers will rack up $60 billion in credit card debt next year.
Those are two of 10 2015 Credit Predictions being made by CardHub, which said it developed its forecast following discussions with a panel of leading finance experts, and added that over the past three years its annual predictions have graded out at 3.62 on a four-point scale.
The company’s Top 10 predictions:
1. Interest rates will rise but remain near record lows
Experts are divided in terms of the fate of rates in the New Year, noted CardHub. Most believe that credit card interest rates will hold steady, including Matt Sheridan, a senior lecturer in finance at The Ohio State University, who said, “I do not expect a meaningful rise in rates in 2015. The credit card companies have strong pricing power with Libor falling and improving fundamentals. … In addition, with oil prices down almost 30% it is reasonable to expect strong consumer spending in the coming months which will boost credit card transactions.”
A few others, however, foresee increases of 1 to 2 percentage points in 2015.
“I expect short term rates to rise during 2015, and hence credit card interest rates to rise,” said Hal Heaton, the Denny Brown Professor of Finance at Brigham Young University. “The forward rates on short term rates are looking at about a 1% (100 basis point) rise during 2015.”
With that in mind, it’s fair to expect slight increases in average rates, yet an overall market where it is still very inexpensive to borrow, noted the company.
2. Credit will be increasingly available
CardHub said all of the experts expect credit to be in greater abundance in 2015 due to a confluence of factors, from the improvement of the economy and household balance sheets to the need for banks to boost profits in the absence of significantly higher interest rates.
“[Credit will be] modestly more available, since bank credit quality and capital adequacy levels are much improved over 2012 and 2013, the U.S. economy is growing (albeit slowly), the unemployment rate is falling, and commercial bank appetites for risk-taking is vastly improved from levels observed in 2009 through 2013,” says D. Anthony Plath, an assistant professor of finance at the University of North Carolina at Charlotte. “In addition, the ability of banks to continue boosting profits through loan reserve release is just about over, and operating costs in the industry are currently quite low for most banks, so the only way for banks to post profit increases in 2015 and 2016 is through enhanced revenue generation.
3. Consumers will rack up $60 billion in credit card debt
While many economic indicators are painting a relatively rosy picture of the economic trajectory in the new year, credit card debt levels are one metric offering cause for concern. American consumers have steadily added more and more credit card debt over the past three years, from a $36.8 billion build-up in 2012 to $38.8 billion in 2013 and now a projected $54.8 in 2014. Expect the downhill slide to continue in 2015, said CardHub, as consumers have not learned anything about the dangers of overleveraging from the trials and tribulations of the Great Recession.
Ryan Brewer, assistant professor of finance at IUPUI Columbus, believes that, “Consumer debt levels will rise slightly as consumer confidence continues its slightly upward trend going forward. Americans will take on a bit more debt as they begin to see wages rise and jobs continue to be comparatively more available versus in recent times.”
4. Apple Pay will gain market share
In recent years, CardHub has forecast the mobile wallet industry gaining little traction with consumers. This year will be different, the company believes, following the high-profile release of Apple Pay.
Not only did Apple Pay hit the market with a great deal of hype, but early returns have shown the system to be a success at the relatively small number of stores equipped to use it, pointed out CardHub. As more stores come online and as Apple Pay-equipped devices further permeate the market, expect adoption to increase significantly – further extending the lead Apple has established for itself over the rest of the mobile payments market, the company explained.
5. Checking account overdrafts will be regulated as credit
The final quarter of 2014 saw the Consumer Financial Protection Bureau introduce a new set of rules for the prepaid card market. Among them are a number of provisions that classify overdraft protection as an extension of credit and extend credit-related underwriting rules to prepaid cards as a result.
CardHub expects checking account overdraft rules to get the same treatment as prepaid cards. That means banks will have to evaluate customers’ ability to pay prior to offering them overdraft protection as well as send them regular statements when they avail themselves of the service and refrain from automatically using one’s balance to pay the overdraft bill, among other requirements, CardHub explained.
6. Chip cards will make a big splash
CardHub expects the U.S. migration to EMV will accelerate in 2015, with the Visa and MasterCard liability shift deadline slated for October. The more chip-based cards and chip card readers are on the market, the harder it will be for fraudsters to steal credit card information, the company added.
7. Data breaches will continue to wreak havoc
CardHub predicts the large-scale data breaches the U.S. experienced in 2014 will continue next year, saying the intrusions appear to be “a fact of life in modern commerce, something we must learn to adapt to rather than solve completely.”
“We live in an era where data breaches are not an ‘if,’ they’re a ‘when,’” said Mike Whitman, program coordinator for BBA-Information Security and Assurance at Kennesaw State University. “Perfect security is a myth. Any organization, any individual can be the target of a data breach.”
8. Card rewards will continue to be bountiful
Rewards programs, strong in 2014, will see little change in their value next year. While many of the best customers on the market have already availed themselves of a lucrative initial bonus deal, these offers – together with attractive ongoing earning rates, preferably across all transactions – have proven adept at catching the attention of customers and leading them to switch allegiances to a new credit card company, explained CardHub.
In this post-recession environment, in which the most wealthy and responsible customers are so valuable, it is unlikely issuers will remove their best bait so soon.
9. The real estate market will improve
Modest improvements in the real estate market are expected thanks to interest rates that will remain near record lows, a more robust job market, pent-up purchasing demand and increased credit availability due to new mortgage guidelines.
Robert Chirinko, professor of finance at the University of Illinois at Chicago, foresees “a slight rise in rates, as the effects of QE dissipate and the housing recovery proceeds slowly.”
10. Private mortgage insurance will take center stage
Fannie Mae and Freddie Mac introducing new underwriting rules that reduce the required down payment for homebuyers from 5% to 3% will increase the number of people purchasing a home with less than a 20% down payment, and increase the need for mortgage insurance, pointed out CardHub. FHA-backed loans were the preferred means of satisfying this requirement during the Great Recession, but the cost of FHA premiums has nearly doubled in the past few years, according to WalletHub’s latest Mortgage Insurance Report. Now, consumers can save up to $12,000 in just the first five years of having their loan by opting for the combination of a conventional mortgage and private mortgage insurance rather than an FHA loan, explained CardHub, adding that more consumers will realize the benefits of this approach.
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