Rapid Surge in Credit Card Losses Raises Concerns
According to Goldman Sachs, credit card companies are experiencing the fastest pace of losses in nearly 30 years, excluding the Great Financial Crisis. While credit card losses hit a low point in September 2021, they have been rapidly rising since the first quarter of 2022, with an increasing rate only seen during the 2008 recession. This trend is expected to continue, with losses currently standing at 3.63% and projected to rise another 1.3 percentage points to 4.93%.
Record-High Debt and Delinquencies
The surge in credit card losses comes at a time when Americans owe over $1 trillion on their credit cards, a record high, as reported by the Federal Reserve Bank of New York. Analyst Ryan Nash predicts that delinquencies could continue to underperform seasonality until the middle of next year, and he doesn't anticipate losses peaking until late 2024 or early 2025 for most issuers.
Unusual Acceleration Outside of Economic Downturn
What makes this situation unusual is that the losses are accelerating outside of an economic downturn. Nash highlights that of the past five credit card loss cycles, three were characterized by recessions. The two cycles that occurred when the economy was not in a recession were in the mid-'90s and from 2015 to 2019. Nash draws on historical patterns to determine further losses and suggests that the current cycle resembles the characteristics of the late 1990s and the 2015-2019 period.
Implications and Future Outlook
Historical data also reveals that losses tend to peak six to eight quarters after loan growth reaches its highest point. Based on this pattern, Nash predicts that the credit normalization cycle is only halfway through, supporting the late 2024/early 2025 prediction. Capital One Financial and Discover Financial Services are identified as having the most downside risk.
As credit card losses continue to rise at an alarming pace, it is crucial for credit card companies and consumers alike to be prepared for the potential financial implications. Monitoring debt levels, managing delinquencies, and implementing sound financial practices will be key in navigating this challenging environment.
Implications of Rising Credit Card Losses for New Business Formation
The rapid surge in credit card losses, as reported by Goldman Sachs, raises significant concerns for new businesses. With losses currently standing at 3.63% and projected to rise to 4.93%, this trend mirrors the increasing rate seen during the 2008 recession.
Record-High Debt and Its Impact
The surge in credit card losses coincides with a record-high credit card debt of over $1 trillion among Americans. This financial burden could potentially impact consumer spending, a crucial factor for the success of new businesses. Analyst Ryan Nash predicts that delinquencies could continue to underperform seasonality until mid-next year, potentially affecting businesses reliant on consumer credit.
Unprecedented Losses Outside Economic Downturn
What sets this situation apart is the acceleration of losses outside of an economic downturn. This unusual pattern could pose unique challenges for new businesses, especially those in sectors that are sensitive to consumer credit trends. Nash's comparison of the current cycle to those of the late 1990s and 2015-2019 period suggests that businesses may need to brace for further losses.
Future Outlook and Risk Management
With Nash predicting that the credit normalization cycle is only halfway through, new businesses must consider this in their financial planning and risk management strategies. Particularly, companies like Capital One Financial and Discover Financial Services are identified as having the most downside risk.
As credit card losses continue to rise, new businesses must remain vigilant and adapt their strategies to navigate this challenging financial landscape. This includes monitoring debt levels, managing delinquencies, and implementing sound financial practices to mitigate potential risks.