After a tumultuous few years of consumer cutbacks, new regulations and debt charge-offs, U.S. credit card issuers are now looking at a much brighter future.
Profits from the major industry players are expected to come in at highs not seen since the beginning of the Great Recession. Anticipated revenue of nearly $159 billion for 2014 is a 9 percent increase over the last year and will be the first annual increase since 2008.
So just what’s driving this newfound boom in the credit card business? Industry experts say it’s a combination of factors that seem to be creating a goldilocks environment for issuers.
1. Consumers are ready to spend more
A gradually improving economy is making consumers less anxious about spending. Although the rate of growth in jobs hasn’t been as strong as economists would like, the stabilization in the job market has people breathing a little easier.
As consumers relax and spend more, fees and interest collected by the card companies will continue to increase.
2. Borrowers are becoming more responsible
Not only are consumers spending more, but they’re also not going into delinquency and defaulting as much as before.
This may be due to a general increase in financial health among consumers, and it also may be attributed to consumers who had previously defaulted and are no longer using credit cards to supplement their living expenses. The delinquency rate in the second quarter of 2014 was just 1.16 percent – the lowest in seven years.
3. The Fed’s keeping interest rates low
Another reason for the improving conditions among card issuers is the still historically low interest rate environment. The Federal Reserve has maintained interest rates at near-zero for financial institutions, who in turn make more of a profit when they lend to consumers at much higher rates.
The average interest rate charged by card issuers last week was around 15 percent, for instance.
Plenty of creditors are happy to issue low-interest credit cards, as well.
4. The Credit CARD Act is actually helping
Regulations put in place by the Credit CARD Act of 2009 had been expected to hamper profits at the credit card companies.
However, the resulting behavioral changes may actually be having the opposite effect. With card companies prohibited from charging increasingly higher interest rates to delinquent consumers, it may be giving those cardholders more of a chance to catch up and make good on the debts.
Again, fewer delinquencies and defaults are better for card issuers.
5. Consumers are debt-averse
Finally, changing attitudes among consumers toward the responsible use of credit seems to be catching on. Industry watchers say they are encountering more consumers who express an interest in keeping their debts down.
This shouldn’t be much of a surprise, considering the significant shock from the recession still fresh in many consumers’ minds.
While things are currently looking rosier than they have in years for the credit card industry, experts advise this is a highly cyclical business. An economic shock like we experienced with the Great Recession can change consumer behavior for a time.
However, as the effects of the collapse diminish and memories fade, we should expect a return to the norm – which may mean a return to the typical patterns of over-spending and overuse of credit. For now, though, credit card companies are set to reap the benefits of this “Goldilocks” moment.
Photo credit: Gallo Consulting
Editorial Note: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.