Credit Card Debt Delinquency: Impact Analysis
Summary
- Credit card debt in the U.S. fell from $930 billion in Q4 2019 to $890 billion in Q1 2020.
- The decline was because of federal programs and deferments by lenders.
- However, the situation is grim, and an impact analysis suggests that at least $66.75 billion worth of debt is at risk of delinquency.
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People who recognize that money won't buy happiness are still willing to see if credit cards will do the trick. - E.C. McKenzie in 1800 Quotes, Quips, and Squibs
There's good news, and there's bad news on the credit card debt front. The good news is that Americans reduced their credit card debt to $890 billion in Q1 2020 from $930 billion in Q4 2019. A report by TransUnion also says that delinquency rates were stable between April 2019 and April 2020, mainly because of federal programs and relief and deferments provided by lenders.
Image Source: Statista
Well, that's all the good news I got. There's no more of that and we now must reckon with the bad news. So, let's analyze what part of the credit card debt could go bad and its impact on the economy.
TransUnion Stats
In late May 2020, TransUnion conducted a survey of 2,086 adults and found that 58% of Americans have been financially impacted by the COVID-19 disruption, 5% expect to be impacted in the future, while 13% are unsure of what the future holds. Of those surveyed, 24% did not feel any impact.
Image Source: TransUnion
The financially-impacted group of consumers said that economic anxiety was growing and that they would not be able to pay their bills and loans for the next 5.8 weeks.
Forty-three percent of all those surveyed said credit card debt was the most concerning, followed by utilities, mobile bills, insurance, mortgage, car payments, and personal and student loan repayments. Credit card users were considering paying a partial amount, asking for a deferral, transferring their balances to another card, borrowing from friends or relatives, etc.
Thirteen percent in the survey group said they did not know how they were going to pay and it would be reasonable to infer that a maximum of 13% of Americans could skip paying their credit card bills, while the rest could scrape through a part of their debt with some help.
The Impact of Credit Card Debt Default
On average, 41.2% of American households carry a credit card debt of $5,700 per household. It is also estimated that 189 million Americans have a credit card.
TransUnion has formulated a model that predicts delinquencies, and as per its model, the delinquency rate deteriorates to 3.6% when the unemployment rate rises to 5%. The (official) unemployment rate is now 13.3% and therefore it will be more than reasonable to estimate that delinquencies will deteriorate to 9.5%. However, I am assuming the number to be 7.5% because dynamics can change going forward. I also am ignoring the 13% number reported by the TransUnion survey because it is conducted periodically and the number can keep changing frequently.
Image Source: TransUnion Webinar on COVID-19 Impact
Assuming credit card debt levels to be $890 billion (the same level they were as in Q1 2020) and a 7.5% delinquency rate, we're talking about $66.75 billion worth of credit card debt at risk of default. I predict that this default is not likely to impact the big banks, as I tweeted earlier too, on Jan 27, 2020.
Image Source: Twitter
In Jan 2020, I had reported about credit card delinquencies in The Lead-Lag Report and tweeted that defaults would not impact big banks. In my opinion, the guesstimated 7.5% default rate will negatively impact the smaller banks. It also will hit the demand for discretionary goods, and if the virus disruption prolongs, the delinquency situation will get even more depressing.
Summing Up
There are two conclusions to this post:
1. As of June 19, 2020, there are high chances that at least 7.5% of credit card debt will turn delinquent. Smaller banks will be adversely impacted, but large banks will easily absorb the shock. Sentiment will get impacted and spending on consumer discretionary will fall, and banks will tighten credit norms. There is buzz about a second stimulus check. If that goes through, the delinquency rate will drop a notch.
2. The second conclusion is that we cannot decisively predict the outcome because we don't know how the COVID-19 situation will pan out. We reopened the states without flattening the pandemic curve, and cases have started spiking again. New cases have spiked to record highs in six states that have reopened, and politicians have proclaimed that there won't be another lockdown.
We are now left with no option but to try out herd immunity, with no estimates of how the pandemic will unfold. What if the cases spiral out of control? What if the spike stresses our healthcare system? What if there is another round of pink-slipping? What if the vaccine that is expected in September 2020 does not work? It is almost impossible to estimate the economic impact if these events were to occur.
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