When we consider the U.S. economy, we see good and bad news. The good news is that we've almost reached full employment, and consumers are feeling confident about their ability to maintain a stable income, make large purchases, and repay loans. The bad news is that confidence may be misplaced, since U.S. consumers’ credit card debt is at an all-time high, and delinquencies are rising.
Rise in Credit Card Debt
Americans’ total outstanding credit card debt is higher than it’s ever been, surpassing $1 trillion last year. Here are some 2018 facts from CNBC Personal Finance:
- The average American holds a credit card balance of almost $6,500, a 3% increase from one year ago.
- 43% of Americans have carried a credit card balance for two years or more.
- The average U.S. household with credit card debt owes almost $17,000 on their cards!
Exacerbating the rise in credit card debt, we're seeing increases in delinquencies at all levels, according to the Federal Reserve Bank of New York. Between the increased levels of debt and rising interest rates, financial institutions are finding themselves absorbing greater losses.
According to the Federal Reserve, small financial institutions (defined as those with less than $10.5 billion in assets) experience the greatest impact from increased credit card delinquencies. Charge-off rates have increased almost 3% in the last year, the highest rate in the last eight years.
Minimize Delinquencies for Your Financial Institution
When facing increased nonpayment of your institution’s credit card accounts, the best defense is a good offense. Document strict guidelines for extending credit, and stick to them. Vetting credit applicants thoroughly and taking into account existing debt when extending new lines of credit is crucial. It has been proven that consumers are not accurate judges of their own ability to pay bills, so you must protect your credit union by saying “no” to borrowers who present as bad risks.
With subprime borrowers failing to pay on credit card accounts at a greater rate than borrowers with high credit scores, there’s reason to believe that the industry’s willingness to loosen lending guidelines has contributed to the increases in delinquency we're seeing now.
Help Customers Protect Themselves
Once you have your financial institution’s lending criteria established and enforced, you can provide assistance to approved borrowers through payment protection programs, which help continue loan payments during periods of involuntary unemployment or if the protected borrower becomes disabled. Payment protection programs can even pay off a loan upon the borrower’s death. Borrowers with payment protection can rest assured they won’t leave their family struggling to repay outstanding debt in an already stressful time, and your financial institution benefits from guaranteed payments. Payment protection programs consist of either credit insurance or debt cancellation. Most will provide the following:
- Loan payoff in the event of the borrower’s or co-borrower's death.
- Involuntary unemployment insurance that makes a specific number of loan payments after a job loss that was out of the borrowers' control.
- Disability coverage that helps repay a loan while either borrower is unable to work due to illness or injury.
Consumers’ overconfidence in their payment ability is a negative byproduct of a positive economy. Fortunately, there are ways to protect your financial institution from the effects of increasing credit card delinquencies. By adhering to lending guidelines and offering payment protection products, you’ll protect your customers from overextending themselves and protect your financial institution from financial loss.
Learn how your financial institution can optimize your risk management program with our ebook, The Recipe for Risk Management. Click below to download!