Lately it seems the economic news only continues to get worse. In the last few weeks, consumer credit has reached all- time highs and auto delinquencies have neared those not seen since the worst point of the Great Recession. This past week, lenders had still more negative news to digest.
The subprime category of credit card charge offs are still at record levels not seen since the Global Financial Crisis. Consider the first quarter of the year 2019. In all excluding the biggest 100 banks in the U.S., the rates for credit card charge offs have now been over seven percent for six quarters consecutively. In the worst point of the last terrible recession, these bank charge off rates remained over seven percent for only four quarters in total, and these were not consecutive.
The rate for Q1 charge offs declined a tad to 7.37 percent. This was too insignificant to impact the seven percent level though. For the biggest 100 banks, the charge off rate on credit cards increased to 3.78 percent, per the most recent data release from the Federal Reserve. This itself is the biggest level since that seen in 2013 in the first quarter. When you count all commercial banks in total, this charge off rate increased to 3.83 percent, its highest amount going back to 2012’s Q4 as the chart below shows:
Clearly the trend is not moving in the hoped for direction with the latest data release.
One picture that is increasingly clear: the nation’s smaller banks are the ones holding the bag for a huge part of the subprime category of credit card debt. This is because these smaller banks felt compelled to go after a higher amount of risk in order to increase their credit base. It is the only way that they are able to effectively compete with the larger banks. The result is that the charge offs and delinquency rates will be higher on the credit cards of the smaller banks.
Some of the banks have decided to charge off the bad accounts in an effort to clear their books (and make more bad loans?). This is why the delinquency rates for banks excluding the 100 smallest have dropped to 5.43 percent. This came after reaching 6.2 percent for the third quarter. It may seem like good news, but the 5.43 percent delinquency rates remain historically high. In the worst days of the Great Recession, this rate peaked at 5.9 percent. Wolf Street explained this as:
“Some smaller banks that have gone way out on the subprime limb are now getting bogged down in losses on their credit card loan books.”
The silver lining is that the smaller banks in America only have a relatively smaller amount of the total credit card balances. This means that the increasing delinquency rates for now do not mean there is a terrible threat to the banking system as a whole. Yet they are worrying enough to raise your concerns.
Right now, Americans hold more than $1 trillion in credit card debts. The total U.S. consumer debt increased by $10.3 billion for March. This brought it to an all-time high of $4.05 trillion.
This is to say that Americans are highly leveraged with debt. Increasingly, the so-called economic boom of the last decade appears to be have built entirely on credit. What will occur when these credit cards reach their limits? Remember that on the last occasion that subprime credit cards’ delinquency rates were so elevated, the entire economy was being ravaged by an unparalleled recession, including unemployment nearing 10 percent. Nowadays this is supposed to be a healthy and growing economy with almost all-time low unemployment.
Is Your Retirement Portfolio Prepared from the Rising Credit Card Chargeoffs?
This latest charge off data is a loud warning bell. Borrowers with riskier profiles always feel the economic pain first because of their less than stable financial situations. The problems only go up the proverbial ladder higher from here. There are a rising number of individuals who are clearly struggling to keep up with their bills, and it should get your attention.
This revived U.S. economy was built up entirely on cheap money and easy credit (aka debt). It is time to find a reliable safe haven to protect your portfolio from rising debt defaults. Thanks to its 3,000 years of safe haven history, gold delivers this effectively. Having your assets protected by the hedging yellow metal means that you will sleep better at night.
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