Opinion: As Issuers Aim for the Sweet Spot Between Debt and Delinquencies, So Should Cardholders

Per Federal Reserve data, the total credit card debt in the United States hit a whopping $1.14 trillion in Q3 2024. In fact, it’s the highest debt level in over 25 years, since the Fed has been tracking this statistic.

And now (shocked-not-shocked) consumers are falling behind on payments, and a rising portion of them are not paying their bills at all.

When the cardholder is 120 days to 180 days delinquent on payments, the issuer will usually write the debt off its books, considering them uncollectible. At that stage the issuer will either sell the account to a third-party collector for a fraction of the balance or take legal action against the debtor. In both scenarios, the issuer takes a serious financial hit. 

Credit card issuers have determined that the cutoff point for an acceptable amount of write-offs is 3.5% at the most. More than that, and it’s an indication that trouble is brewing. Which is where we are now. The write-off rate is teetering at 5%. 

Such a high percentage of people walking away from their obligations is not just alarming issuers, but the bells should be going off for cardholders too. 

Which brings us to the next clear sign that there is danger in credit land. On February 4,the United States Courts reported that total bankruptcy filings rose 14.2% in the 12-month period ending Dec. 31, 2024. This is exactly what creditors don’t want. Nor is it a joy for consumers to admit defeat. 

It’s time for both parties to pull back on the credit reins. 

Just how much debt is healthy for a consumer to carry over? I usually say the correct answer is zero, but I aim to be realistic. 

There are plenty of people who hold onto credit card balances and still remain in positive financial positions. For example, they may leverage a credit line to get ahead with a business.

Others may charge their way out of an emergency when their savings fall short, and then repay the debt in a few installments. When no interest is added, as would be the case with cards offering temporary 0% APRs, it can make sense. 

For credit card issuers, the amount of debt cardholders accumulate then revolve from month to month is highly significant. As lenders, they need to ensure that consumers have the ability to borrow, but they also want to keep the default risk at bay. 

It’s a delicate balance. 

Providing large credit lines to consumers is positive, but only when the cardholder uses it responsibly. 

But problems do happen, and credit card issuers also need to present early intervention strategies to those who are in over their heads or seem to be heading in that direction. How can they make repayment easier and even less expensive so the cardholder is motivated to continue to pay down their debt, even when times are tough? 

Most people want to pay their bills and keep their credit in good standing. To mitigate write-offs, cardholders who are exhibiting signs of trouble may be connected to a helpful representative or offered assistance from a credit counseling agency.

The issuer may present a hardship program with a few months of smaller payments and reduced interest rates. When a financially stressed cardholder is given a reasonable option to get back on track, odds are they’ll take it. 

As for lowering credit lines, certainly card issuers may decide to do that too. The Fair Credit Reporting Act gives credit card issuers the right to lower credit limits at will, and it can limit potential losses. 

For example, if an account has a $20,000 credit line but the cardholder has been carrying $10,000 for a while and has begun to miss payments, the issuer may decide to slash the limit in half.

A smart move? Maybe, but it can also make matters worse for the struggling cardholder. Not only will they not have access to their card, their credit scores will decline when the credit utilization ratio closes. It can disincentivize the cardholder from repaying at all. 

So with the sky-high consumer debt, rising write-off rates, and escalating bankruptcies in mind, this is the perfect time for both card issuers and cardholders to do some soul searching. 

How much debt can they really handle? Now more than ever card issuers need to lend prudently and cardholders must borrow within their means. 

What will each party do if balances do start to get out of hand? Credit issuers can help by making debt repayment easy and attractive, with a focus on early intervention. And cardholders need to grab the lifeline. If they don’t, they may make a decision they’ll regret for years. 

Abandoning credit card debt, whether by letting it go to collections, getting sued, or discharging it in bankruptcy has profound and long-lasting ramifications. When we agree that no one wants to reach those extremes, solutions can be found.