By Ray Birch
MADISON, Wis.—Credit union members are doing their part to contribute to the concerns being raised by some over the record pace of growth in outstanding balances.
It could mean a 2020 vision for credit unions that is tough to view.
CUNA Mutual Group’s Chief Economist Steve Rick pointed out that credit union credit card balances grew nearly 10% over the last 12 months—the fastest pace in the last eight years.
As CUToday.info has reported, consumers have surpassed $1 trillion in total credit card debt for the first time, averaging $8,166 in monthly household debt—$300 away from reaching an unsustainable level, according to WalletHub. And consumers are certainly in a borrowing mood, as the total tab for overall consumer debt could reach a record $4 trillion by the end of 2018, reports indicate.
“Credit unions are really packing on a lot of credit card debt, which means their members, average working class Americans, are packing on a lot of card debt very quickly,” said Rick. “Balances growing by 9.8% over the last 12 months is pretty fast growth.”
Big Gap
The biggest concern Rick has with that growth is compared to consumer wage growth there is a huge gap.
“Incomes are growing at around 3%, and card debt is growing near 10%...” said Rick. “That means people are really using a lot of credit to finance their spending and that can lead to problems.”
Rick said that spending trend will become a very serious concern if consumers are using credit to finance their everyday needs, not just larger purchases, for example.
“If they are using credit for consumption spending, like gas and groceries, that is never a good thing,” he said.
And Rick, like other analysts, believes some early warning signs are appearing. He noted card delinquencies are rising overall, including at credit unions.
“We are seeing delinquency rates and charge-offs going up at credit unions,” he said.
Steve Rick, CMG
Charge-Offs 2.86%
In the first quarter of 2018 credit union charge-offs stood at 2.86%, compared to 2.56% in Q1 2017.
“So they went up 30 basis points in one year,” noted Rick.
CU delinquencies are 1.24% today, and they were 1.09% as of March 2017, Rick said.
“People are getting later on their payments and the loan quality is starting to deteriorate somewhat,” he said.
The rising rate environment is not helping consumers, added Rick, who said rising delinquencies is a sign monthly budgets are struggling handle the higher payments.
“In the last 12 months, looking at April 2017 and April 2018, the annual percentage rate on credit cards has risen from 10.3% to 10.8% at credit unions,” said Rick. “So, this is adding insult to injury, as the saying goes. People are taking on more debt, which is the insult, and the interest rate going up on the debt is the injury. A double whammy. People living paycheck to paycheck are suffering financial stress.”
Double-Digit Loan Growth
Rick said that some of the overall consumer debt problem can be attributed to strong credit union loan growth in the last four years. He pointed out that CUs have enjoyed double-digit loan growth annually in that period.
“So what we are seeing in some of these delinquencies is coming from a seasoning of all the loans that have been put on the books three and four years ago,” said Rick. “Someone is far less likely to be late on a payment in the first year or two of their loan.”
Rick emphasized that the strong economy is encouraging people to have more confidence in their jobs and therefore also more confident in taking on more debt. But they are not paying attention to the rising rates.
“I don’t think consumers really pay a great deal of attention to the fact their rate can go up, especially credit card rates,” he said. “They get an offer to take a card from Macy’s and receive 10% off their purchase. So they take the card and don’t even realize that it’s a variable rate and a high one at that.”
Rick said that the strong economy is one reason consumers, for now, may be able to manage their debt. He also noted that delinquencies, while rising, are still at record lows. But he is concerned about what may occur in two years.
“I am forecasting the next recession to arrive in 2020,” Rick said. “When that happens, people will lose their jobs and then you will see charge-offs and delinquencies really move up.”