Credit Card Defaults Surge Most Since Financial Crisis

In late April, after some disturbing monthly charge-off reports from major credit card vendors, we reported that according to the latest data from the S&P/Experian Bankcard Default Index, as of March 2017, the default rate on US credit cards had jumped to 3.31%, an increase of 13% from a year ago, and the highest default rate since June 2013.

The troubling deterioration prompted Moody's to pen its own report yesterday titled "Spike in Charge-off Rates Indicates a Slide in Underwriting Standards" and as Moody's analyst Warren Kornfelf writes, the steep increase in credit card charge-off rates in 1Q’17 and 4Q’16 was the largest since 2009, and indicates that "strong underwriting standards in place since the financial crisis have deteriorated, potentially rapidly."

According to Moody's, the "the size of the jump was surprising in light of the ongoing strength of the US employment market" unless of course the BLS is chronically, for political reasons or otherwise, misreporting the real dynamics in the labor market, or else the even more chronic failure of rale wages to rise means increasingly more Americans can not even make their minimum credit card payments.

First quarter charge-offs were highest for Capital One Financial, First National of Nebraska and Synchrony Financial (unrated), whose portfolios were already the weakest performing. Charge-offs at Capital One, First National of Nebraska and Synchrony rose to 5.31% (up 1.08% year-over-year), 4.21% (up 0.71%) and 5.40% (up 0.56%), respectively.

Capital One especially stood out, as its Q1 charge-offs almost reached their historical average while Discover and First National of Nebraska’s climbed to just over 80% of theirs; Citigroup rose to about 70%.

Another confirmation there is something very wrong with the consumer (or measures of US economic resilience), receivable growth at most issuers has exceeded U.S. nominal GDP, which totaled 3.7% in 2015 and 2.8% in 2016; when credit growth significantly exceeds nominal GDP growth it raises potential red flags such as aggressive underwriting to drive loan growth.

As noted last month, the results of the Fed’s latest survey of US bank senior loan officers showed a weakening in underwriting standards, coupled with plunging demand for credit cards and auto loans.

In Q1 2017, banks reversed the net tightening that they reported in Q4 2016, the first reversal since 2010. Moodys warsn that the steady and modest loosening of standards from 2011 to 2016 reflected an ongoing period of normalization4, but lending standards and the credit quality of new accounts can change quickly. Additionally, the Q1 2017 loosening has only been matched or surpassed in four quarters since 2012 (Q2 2015 and three 2014 quarters). The only positive news from the Q1 2017 survey was that for the first time in at least seven years, two percent of banks reported that they had tightened their credit card standards considerably

If lending standards continue to degrade, things could get messy in a hurry in the event that the economy takes a turn for the worse, according to Warren Kornfeld, a senior vice president at Moody's.

“Although card standards were extremely tight in the years following the financial crisis, if underwriting then loosened materially, as the rise in charge-offs suggests, asset quality could continue to deteriorate rapidly going forward, especially in the event of a recession,” said Moodys.

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Whatever the reason for the sudden surge in credit card charge-offs, it's not the only red flag about the state of the US consumer. Recall CoreLogic's warning from last month, namely that that stalwart of any viable business cycle, mortgage performance, has finally started to deteriorate...

While loan performance improved across various loan types throughout the first five years of the expansion, over the last year three of the four major types of loans began experiencing a deterioration in loan performance. The exception to the deterioration in credit performance was real estate, which continues to improve. However, a closer look reveals performance is deteriorating, albeit from pristine levels of performance.


... While performance for the 2016 vintage is still very good from relative to the last two decades, it is beginning to worsen. Historically, when the mortgage credit cycle begins to deteriorate it continues to do so until the economy bottoms and the credit cycle begins to improve again.

... and it is becoming clear that the US consumer, responsible for 70% of US economic growth, has finally rolled over.


secretargentman Fri, 06/09/2017 - 08:45 Permalink

There is no moral imperative to repay a loan that was created out of nothing. Only reasons to keep paying are practical or strategic. Once it's no longer in your best interest to pay, stop paying. 

GooseShtepping Moron secretargentman Fri, 06/09/2017 - 09:02 Permalink

There is a moral imperative to pay for the things you bought, you idiot. You don't just get to charge up your credit cards and then walk away from the bill by saying, "This is all made up! I don't need to pay this!."You took delivery of goods and services, and the credit lending bank fronted you the short-term funds to do so. That's why you need to pay your bill.

In reply to by secretargentman

scoutshonor Fri, 06/09/2017 - 08:49 Permalink

It is pretty clear that the smug bankers assume that another bail-out is in the wingtips.  Probably is--but I will enjoy their screams if instead the hear no.  Finally.

lester1 Fri, 06/09/2017 - 08:56 Permalink

Well it looks like we now know why brick and mortar retail is in the toilet ! Let's see how the idiot globalists at CNBC will spin this..Helmet head Kelly Evans will probably say this is transitory. Cramer will tell us to ignore this. Bob Pisani is wetting himself, and Scott Nations is praying to the PPT God for help. Lol

I am Jobe Fri, 06/09/2017 - 09:02 Permalink

So amny things to buy, so much to shop and so much to spend. CONsumers, all Americans are and they want to be spending over and over. Now that Summer is here, Kids camps, Disney Vaca, just spend spend spend. 

PitBullsRule Fri, 06/09/2017 - 09:35 Permalink

The people that get auto loans are generally unsophisticated borrowers, and the people that get mortgages are usually more sophisticated.  Its expected that a large number of auto borrowers will default, its built in to the price of the car and the loan.  This doesn't mean much because graduates from high school or college usually buy a car, which is a terrible investment, and some of them default, learn from that mistake, and then save money to buy a house.  Its part of growing up, for some people.

Russdiamon Fri, 06/09/2017 - 10:25 Permalink

Sure seems like a lot of negative new coming out today. I remember what it was like when the market has had big drops because of stuff like this. You should check out this guy, he’s been calling for a top lately and actually has a really good history of calling stuff like this and drops. You should see what he’s saying.check this out

Phyz Stacker Fri, 06/09/2017 - 10:55 Permalink

I have a small mortgage and no cc debt.  My savings is in cash and PM's.  I am a prepper out of fear and concern for my family.  Our economy is unsustainable IMHO.  The 1%ers will be fine.  We on the other hand will lose everything if we are not careful.  KEEP STACKIN !

assistedliving Fri, 06/09/2017 - 13:36 Permalink

the ZHers who comment "no moral imperative...dont' repay" are deplorable.They're the same ones who took out LIAR loans, move into your neighborhood, can't pay the mortgage and abandon the home dragging the entire 'hood down w/ themNice

secretargentman assistedliving Fri, 06/09/2017 - 14:09 Permalink

People who think there IS a moral imperative to repay loans created out of NOTHING are delusional. Learn how fractional reserve lending works. Learn how our currency comes into existence. A certain level of default is baked into the cake. It is literally impossible for everyone to pay back their loans.Lets be clear: I'm not talking about loans created from actual money, where the money exists beforehand and belongs to someone. Those are legitimate loans. I'm talking about loans created out of NOTHING in the fractional reserve system.Blaming suckers and poor people for the evils of a fraudulent system is deplorable.

In reply to by assistedliving