The Banking Sector has Confidence in US Consumers and Bets on Credit Cards

A Break with Tradition

Inflation is high and recession concerns are looming large. Even so, many banks don’t seem particularly worried about consumers’ ability to pay off their credit card accounts. Bank executives see low unemployment as one reason for optimism. There is also the allure of rising fee revenue due to inflation-driven increased spending.

This perspective runs contrary to traditional expectations that banks would take a more cautious stance in the face of a slowing economy. What’s more, credit card debt represents unsecured loans, providing lenders with limited recourse in the event of default.

Unexpected Behavior

The blasé attitude comes on the heels of atypical consumer behavior during the pandemic. Unemployment spiked in early 2020, but credit card delinquencies didn’t surge, as has happened in the past. In fact, consumer debt shrank. It seems Americans used stimulus checks to pay down debt.

Total credit card debt shrank by almost 20% from January 2020 to April 2021, according to credit-reporting company Equifax (EFX). These outstanding loans have notched up since then, but at $855 billion in May 2022, the total amount is still below the $913 billion tally of January 2020.

Teasers and Perks

The strong labor market isn’t the only thing banks are looking at. High payment rates are arguably an indication consumers will continue to service their debt, despite significant economic headwinds. The repayment metric refers to the portion of total balances that borrowers pay down, and it remains high per historical standards. Bank executives believe that suggests Americans have healthy liquidity despite high inflation, which erodes purchasing power.

With banks betting on consumers, Americans can expect to see more credit card solicitations to open accounts, some with significant sweeteners like 0% interest rates, miles, or other perks. As always, it’s important to consider how that fits in with your spending habits and income level.

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