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Credit cards reveal financial health status

Credit cards reveal financial health status

Many variables influence card debt levels.

September 20, 2016

“Data that speak to the financial health of the average American household can be quite telling,” notes a recent WalletHub article

“Credit card debt statistics, in particular, reflect consumer sentiment and can foretell overleveraging bubbles that may trigger constriction across lending markets.”

American consumers tallied up $34.4 billion in card debt—a new record—during the second quarter of 2016. 

Other card debt trends of note:

  • $71 billion in debt piled up last year, the most since 2007; and
  • $27.5 billion in paydown of card debt during first quarter 2016, the least since 2008.

Debt projections at WalletHub are that consumers will conclude the year having grown card debt around $80 billion, resulting in balances outstanding beyond $1 trillion—a first. 

The average credit card debt held by households is expected to be $8,500.

This week, consider debt trends and other prevailing card issues impactful to good financial health for consumers and financial institutions.

‘There are no shortcuts when it comes to getting out of debt.’  --Dave Ramsey, author

Why is card debt on the rise?

“Contrary to the popular belief that individual irresponsibility drives debt accumulations, research shows that structural inequalities play a key role,” notes an article at Salon 

Variables that influence debt levels include things like age, education, available assets, insurance, and employment. 

For example:

  • Households lacking health insurance for at least one member over the last three years are 20% more apt to have card debt, versus families that have had no lapse in insurance coverage. 
  • College degree holders are 22% less apt to hold card debt than those who have not studied beyond high school.
  • Stalled incomes cause card debt to accumulate. 

Savings trends have improved, notes an nbcnews.com post.  But, many consumers continue to rack up debt that grows month after month, according to the 2016 Consumer Financial Literacy Survey.

The survey reveals 35% of consumers do not pay off card debt monthly; and 14% carry balances of more than $2,500 per month, compared to 11% in 2015. 

This comes with a hefty price tag as interest rates average 15%, and late payments may drive the rate to almost 30%.

Forty-eight million Americans have credit scores under 600; equal to more than one in five consumers. This includes over 30 million millennials, notes NerdWallet’s Second Annual Consumer Credit Card Report

“The subprime credit market is huge, and predatory card issuers are circling,” the study says.

Important discoveries:

  • Subprime consumers holding scores below 600 pay bigger fees, higher insurance rates, and have limited housing and job choices.
  • Card issuers focusing on this market offer agreements and fee structures “more complex” than other issuers, but the targeted demographic is less educated.
  • Consumers with subprime credit ratings pay hundreds of dollars more in fees when they choose a card from a subprime specialist provider.

In fact, cards issued by subprime specialists average costs $125 more annually than those offering secured cards.

In comparison, “Competing for new customers, some card issuers have done the remarkable: They eliminated fees,” notes CreditCards.com.  Of 100 surveyed general-purpose card providers, total fees charged were 593. This is a dip from 613 fees charged in 2015.

Some typical fees:

  • Balance transfers: 3% of amount transferred or $5 to $10 minimum, whichever is greater.
  • Cash advances: Either $10 or 5% of transferred amount, whichever is larger.
  • Annual fees: Ranging from $25 to $450.
  • Penalty fees: Late fees up to $37; returned payment fees up to $37; and over-limit fees up to $39.

‘No man’s credit is as good as his money.’  --Edgar Watson Howe, novelist

Credit Card Applications Up, Rejections Down,” says CreditCards.com in its coverage of the New York Federal Reserve Bank’s June Survey of Consumer Expectations.

In June, 31% of consumers sought a credit card in the prior year. This is up from 28.5% who did so in February—the greatest number on record since statistics were tracked in 2013.

Growing incomes contribute to more applications.

“People with fair to poor credit have the largest appetite for credit cards,” the article says. 

Indeed, 37% of those seeking credit had scores under 680. Thirty-five percent had scores ranging from 680 and 760. Those with scores above 760 comprised the remaining applicants.

Also, 12% sought increase in credit limits, a dip from 15% in February. Of those who hoped to raise credit limits, 16% were rejected. This is a decrease from 22% who were declined in February.

Consumers expect they will continue looking for credit cards; 11% indicated it was likely they would do so in the upcoming 12 months.

Another interesting variable on card debt payments is revealed at a recent post in The Wall Street Journal: Loan Stress: Missed Home-Equity Payments Spell Trouble for Mortgages, Credit Cards.”

Home equity lines of credit (HELOC) are resetting such that many borrowers need to up payments from interest-only to also include principal.

This can create problems for credit card lenders as “delinquencies on those HELOCs are rising and resulting in a domino effect of missed payments on regular mortgages and credit cards.”

In fact, 26.5% of delinquent HELOC borrowers slipped on card payments as well once HELOCs reset.

‘Stores are never nice to people. They’re nice to credit cards.’  --J.F. Lawton, screenwriter, Pretty Woman

Consumers need to take greater care in choosing their credit cards, according to research findings. 

See “Many Customers Are Carrying Wrong Credit Card, J.D. Power Study Finds”  as an interesting example. Here, nearly one of five consumers has the wrong card. More than 20% carry cards with fees and rewards that do not correlate with buying habits.

Most of the time, consumers choose cards based on rewards offered, although “20% of customers who have a rewards card would better benefit by having a different rewards card or a lower interest rate card without rewards,” according to the J.D. Power study.   

Cards co-branded with airlines are popular, despite annual fees that typically start at $75. But, 44% of these cardholders don’t spend $500 a month to make up for the annual fees charged, fail to use benefits gained in the prior year, or don’t cash in rewards from the past 18 months.

Consequently, users of these cards “have higher intent to switch cards.”

Also, “Travel Rewards Can Lead to Credit Woes for Many Americans,” notes the Journal of Accountancy.

A Harris study shows 58% of American consumers use cards to obtain rewards used for various travel expenditures. But only 15% use these benefits to pay for all or a portion of a trip.

“Chasing these rewards and associated debt levels can have very real consequences on your monthly payments and credit score,” the article says.

Some consumers will use the cards to contribute toward travel costs, but ultimately can’t pay the bill in full on the following statement. Last year, 3% missed payments or had late fees because of travel expenditures. 

Six percent would book a costlier flight or hotel to collect rewards, and an additional 6% travel in order to increase or maintain rewards, essentially spending more in order to save more.

A variety of elements surrounding credit card choices and behaviors indicate financial wellness.  These variables also contribute to viability of different types of credit providers; some who may be predatory in nature.

Do your members have a clean credit card bill of health?

LORA BRAY is an information research analyst for CUNA’s economics and statistics department. Follow her on Twitter via @Bray_Lora and visit the CUNA blog, The Research Roundup: Economic Perspectives.