Credit Card Companies Navigate Choppy Waters as Losses Surge to 30-Year Highs
In a financial twist not seen since the Great Financial Crisis, credit card companies are navigating stormy seas, racking up losses at a pace not witnessed in almost three decades, as per insights from Goldman Sachs.
The downturn in credit card losses hit a low point in September 2021. However, what initially seemed like a rebound from stimulus-related dips has taken a darker turn since the first quarter of 2022. Goldman Sachs notes that the velocity of these losses resembles a trajectory seen only during the recession of 2008.
But, hold your credit cards tight because, according to Goldman, this turbulent journey is far from reaching its destination.
Currently standing at 3.63%, a steep 1.5 percentage points jump from the trough, losses are projected to ascend further to 4.93%. This comes at a precarious time when Americans collectively owe over $1 trillion on their credit cards, a historic high, reports the Federal Reserve Bank of New York.
Goldman’s analyst, Ryan Nash, doesn’t foresee smooth sailing ahead. In a note last Friday, he warned, “We think delinquencies could continue to underperform seasonality through the middle of next year and don’t see losses peaking until late 2024/early 2025 for most issuers.”
What adds a dash of peculiarity to this financial storm is that these losses are surging outside the usual economic downturn cycle, Nash points out.
Traditionally, credit card loss cycles tend to coincide with recessions. However, three of the past five cycles have occurred without economic downturns, notably in the mid-’90s and from 2015 to 2019. Nash draws from history to understand the current predicament, highlighting similarities with the late 1990s and the 2015-2019 cycle. This pattern, according to Nash, involves losses increasing following robust loan growth, aligning with the current pace of normalization.
As credit card companies grapple with this unprecedented challenge, the financial landscape becomes a tightrope walk between historic debt levels, rising losses, and an economy not officially in recession. The journey ahead promises to be a rollercoaster of financial uncertainty, with experts eyeing late 2024 or early 2025 as the potential peak for these worrisome credit card losses.
