By Ray Birch
WASHINGTON—Even as more credit card borrowers are getting closer to the “brink” of unsustainable debt, one analyst feels believes there are enough positive signs in the economy and in lenders’ policies to avert another big credit problem in the near future.
But after that…
As CUToday.info has reported, consumers have surpassed $1 trillion in credit card debt for the first time, averaging $8,166 in monthly household debt. That’s just $300 away from reaching an unsustainable level, according to WalletHub. And consumers are certainly in a borrowing mood, as their total tab for overall consumer debt could reach a record $4 trillion by the end of 2018, reports indicate.
But what lies ahead, according to Jill Gonzalez, senior analyst at WalletHub, are fewer opportunities for consumers to rack up a lot more debt. She said the tightening of standards by issuers, moves by consumers themselves to rein in bad habits, and the new just-passed regulatory relief bill will all help keep debt near its current levels for the next year, possibly two.
“I know there are a lot of debt issues, but I think we will start having less opportunities to get into so much debt, and will see more opportunities to pay balances off,” Gonzalez said.
The Warning Signs
She said lenders are already seeing the warning signs, such as rising delinquencies, and are starting to tighten credit, and that the first place consumers will feel the squeeze is in the special offers.
“These zero percent transfer deals for 21 months or on new purchases for 18 months will start going away if not disappear entirely,” said Gonzalez. “Lenders see the delinquencies and know what is happening. Because of this lenders will further tighten lending standards as the year progresses, and in the fourth quarter I predict we will see a lot tighter approval standards, a lot shorter intro periods—especially as we see consumers take out new cards for holiday shopping.”
Gonzalez forecast card perks will also get stingier.
“Despite the big battle for credit card rewards, consumers will see fewer and worse rewards deals,” she said. “This has become a very competitive area for financial institutions, but it too, will slow down.”
Fallout from Reg Relief Bill
Gonzalez noted that S 2155—the Economic Growth, Regulatory Relief, and Consumer Protection Act—will have an effect. The bill allows consumers to place a freeze on their credit report for free, something the credit bureaus have been charging for. She said that following the huge Equifax breach, more consumers are choosing to freeze their credit reports and even more will do so with the fee removed.
Jill Gonzalez, WalletHub
“You will see consumers unfreeze their credit report for bigger life events, like buying a house or a car. But I don’t think you will see them do it as much for credit cards,” she said. “I think they will see that as a bit of a hassle, and simply choose not to take out that new credit card. I think that will really slow down new card applications. That’s a good thing for the debt picture as it gives consumers fewer excuses to get into more debt.”
Gonzalez said that the strong housing market should help to avoid or push further out another recession that will lead to more debt issues.
Gonzalez summed up that the impact on household balance sheets from these adjustments lenders will make and from better consumer decisions will be positive but not life-changing. She said the changes should keep consumer debt levels at about where they are today.
“What we have seen in this past quarter is that consumers are pulling back on debt slightly,” Gonzalez said. “We saw a record high in Q1 as far as consumers paying down their debt. But that is not unusual to see a big paydown in the first quarter of the year—people will put their tax refunds and their bonuses toward their debt to try to stick to their New Year’s resolutions for a while. I think Q1, however, is a sign that consumers are finally starting to realize they just can’t keep piling on the debt. ”
A big reason consumers have piled on the debt is confidence in the economy, said Gonzalez.
‘Wishful Thinking?’
“The economy has been up for some time and we have record-low unemployment. Wages have begun to increase, and I think consumers, more than anything else, believe in the current economy and believe their wages will rise,” she said. “We recently completed a survey on credit card debt and about 90% of consumers said they will end 2018 with less debt than they started.”
Now will that really happen?
“Historically that would appear to be wishful thinking, because we have ended the year with more debt about every year for the last decade,” said Gonzalez. “But at least consumers appear to have it in their heads that they will pay down more of their debt.”