What do consumers need to know now about credit card debt, correct?
That’s right. Credit card debt is almost always a bad thing, but in the wake of the great recession Americans really worked hard to pay down their credit cards, reducing the amount of debt that we collectively carried by nearly $200 billion. However, as the recovery has taken hold and consumer confidence and the labor market has improved, people have again turned to plastic, and we are on track to reach $1 trillion dollars in credit card debt this year, for the first time since 2008, when Americans reached a record $1.02 trillion dollars.
What is behind the growth in this debt?
On the positive side, consumers are feeling better about their economic prospects and their finances than they have at any other time since the 2008 recession. As I mentioned, that is due in large part to the labor market and confidence about job security, as well as modest wage gains. In general, people do not incur more debt in times of hardship. Instead, they pinch pennies and cut back. So, this is a sign of confidence, and it certainly helps the broader economy when people spend money.On the negative side, part of this is driven by the fact lenders are being much more aggressive in offering credit cards and expanding the amount that borrowers can take out on their credit cards. Providing easy access to credit often gets consumers in trouble.
Why are the banks offering people credit?
In large part, because issuing people plastic is one of the few areas where banks are making money right now. Lower interest rates have had a negative impact on their profit margins when it comes to ordinary lending, and regulations have made that lending more difficult when it comes to individuals and small businesses.
Additionally, tougher regulation concerning consumer protections and volatile markets has crimped profits in trading. So banks have turned to credit card operations to make up some of the gap, taking advantage of low delinquency rates and the possibility that they could see interest rates rise again this year.
What are the risks for consumers?
One thing that worries analysts is that lenders are increasingly turning to subprime lending to make bigger profits. I have talked about the rise in subprime lending in the auto loan space on this show before, and now we are seeing this creep into credit cards. This is driven by the fact that many creditworthy consumers are still wary of about using plastic, so lenders are turning more aggressively to subprime borrowers. This carries risk for these borrowers if they are not able to make payments, or if it leads to a debt cycle due to high balances and high interest rates. And both of these will impact the borrower’s credit scores.
Is there any good news for consumers on the credit card front?
Hitting a record for credit card balances is not something to cheer, but this time around consumers do have greater protections. In the wake of the great recession, Congress did enact some major reforms related to credit cards that will prevent some of the pain that borrowers experienced before. For example, it is much more difficult to get hit with late fees or a sudden increase in the interest rate on your card, because those have largely been banned.
As a result, over the last four years, these moves are estimated to have saved consumers more than $20 billion in fees. Additionally, the transparency around the interest rates, the fees and penalties and other rules has greatly increased. Hopefully, this information will help to keep some people from getting into trouble now.
Mellody Hobson is president of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS news and CBS.com.