Credit cards had to contend with growing challengers like debit and BNPL during the pandemic years. Now that the economy is putting additional pressure on consumers, what will credit look like for issuers and consumers alike in 2023?
Last year was a year of ups and downs for the economy and it is likely that 2023 is going to follow the same trend. While the first half of 2022 the economy was officially in the red with GDP bordering at -1.6%(Q1) and -0.6% (Q2), the second half of the year returned to growth. Forecasts from Visa indicate that this trend may repeat in 2023.
Unlike last year, however, the housing market has taken a significant hit. Moreover, the average interest rate on credit cards accruing interest in the last quarter of 2022 was 20.40%, which is significantly higher than the rate of 16.44% in Q4 2021.
Although credit card usage dropped early in the pandemic years, a growing number of consumers turned to credit for their daily payments in 2022. As the chart above shows, average balances have been steadily climbing since December 21, and are up 1.9% compared to December 2021, despite average monthly spending remaining flat. Like Average Balances, the percentage of active credit cards is significantly higher than pre-pandemic times.
Although the upward trend of average balances seems to be good news for issuers, FICO’s Leanne Marshall points out that this may be a double-edged sword. When combined with higher active credit cards rates and macroeconomic conditions, collections may drop resulting in more losses for issuers.
Payment rates have been trending downward since June 2022. While consumer confidence was high at the end of 2021 and the start of 2022, consumers’ ability to make timely payments on their credit card debt is decreasing. In December, the payment rate was down to 27.3%, an 8 point decrease year-on-year.
Echoing these patterns, delinquency patterns have been steadily climbing since June 2021. The number of customers that have missed one payment is up by 19.7 points year-on-year and those that have missed two have increased by almost 50 points year-on-year. Since these numbers have surpassed pre-pandemic trends, it is likely that 2023 will spell a higher probability of loss for issuers than the COVID era.
These reports are in line with data that indicates that savings are down overall as cost of living climbs. The climbing interest rates of active credit cards do not mean that the credit’s tug of war with debit and BNPL options is over, either. In fact, some sources indicate that the debit market is expected to rise to 193.4 million debit card users by 2023, markedly higher than the 169.8 million users a year ago.