Lenders are bracing for a wave of credit card defaults as the pandemic-driven economic shutdowns drag on, impacting the ability of consumers to pay back debt racked up when America’s economy was in the midst of a historic boom.
One out of every four American adults say someone in their household has lost a job to the pandemic, according to a new poll from The Associated Press-NORC Center for Public Affairs Research (AP-NORC). Recent Labor Department data shows that over the past five weeks, over 26 million Americans filed jobless claims, erasing all the job gains since the 2008 financial crisis.
Several large U.S. banks have already stowed away billions of dollars to cover future losses as outbreak-led layoffs and pay cuts will make it difficult for consumers to make loan payments.
Credit card issuer American Express said on Friday it would cut spending by nearly $3 billion in 2020 after its quarterly profit sank 76 percent as it set aside more money to brace itself against a wave of potential delinquencies.
“We clearly have already had significant deterioration,” said Roger Hochschild, CEO of credit card issuer Discover, in an interview with The Wall Street Journal. “This was very quick and cataclysmic.”
Earlier in April, Citigroup announced that its profit tumbled 46 percent on expected credit card losses, while Visa said in late March that its transaction volumes suffered as the pandemic wreaked havoc on consumer spending.
“As countries have imposed social distancing, shelter-in-place or total lock-down orders, domestic spending, most notably in travel, restaurants, entertainment, and fuel, has sharply declined week-on-week,” the world’s largest payments network said in a statement.
Brian Riley, card analyst at the Mercator Advisory Group, recently told The Financial Times that he expects credit card issuers to face a double impact—from falling transaction volumes and a rise in delinquencies.
“When people know things are blowing up, they don’t go out and buy refrigerators—they are not out to beat the system,” Riley said. “Discretionary spending goes way down.”
He said that credit card charge-off rates—which are similar to bad loan write-offs and are a measure of delinquency—typically match unemployment rates, in percentage terms.
In October 2009, around the peak of the financial crisis, the seasonally-adjusted unemployment rate hit 10 percent, while fourth-quarter charge-off rates that same year were 10.51 percent.
With Federal Reserve estimates around jobless numbers expecting a possible upper range of over 40 percent, that could mean credit card charge-offs at levels never seen before.
St. Louis Federal Reserve President James Bullard told Bloomberg radio on March 30 that he expected unemployment within a range of between 10 and 42 percent, while researchers at the St. Louis Fed in late March projected that some 47 million Americans would likely lose their jobs amid the pandemic, putting the rate at around 32 percent.
As the crisis drags on, 11 percent of Americans have missed a credit card payment, the AP-NORC poll found. Also, those with lower incomes are more likely to be falling behind. Thirty-one percent of those with a household income under $50,000 a year have either been unable to pay rent, make a credit card payment, or pay another type of bill due to the coronavirus pandemic. In comparison, 16 percent of those making between $50,000 and $100,000 and 10 percent of those making more than $100,000 have missed a payment.
And yet, the survey also found that a majority of Americans still feel positive about their personal finances. One possible reason, among those whose households have experienced a layoff, 78 percent believe those former jobs will definitely or probably return once the pandemic subsides.