With total US credit card debt topping $1 trillion, should card issuers be concerned?

Americans are far off from having an extra cushion to feel secure against financial hardships, without turning to a credit card or loan. In fact, credit cards have become the default payment method for a majority to make ends meet amid rising interest rates. The total US credit card debt surged $45 billion in the second quarter from $986 billion in Q1 2023 and has now crossed the $1 trillion mark, according to the data released by the New York Federal Reserve.

While the record debt spike provides insight into the deteriorating financial health of consumers, it also tends to open the door to new upticks in delinquencies and charge-offs. As cardholders face mounting pressure on managing their finances and paying down debts, customer loyalty programs, satisfaction, and eventually stickiness are also taking a hit – all of which can be a sign of trouble for card issuers, according to a new J.D. Power credit card satisfaction study. 

When it comes to customer satisfaction, American Express secured the first spot this year with a score of 657, on a 1,000-point scale for the fourth time in a row. Bank of America (629) and Discover (629) followed after and shared second place.

“American Express has a consistently strong suite of bank brand credit card products that are rich in rewards and benefits. They are also adept at customer interaction and communication, whether it is digital, live phone, or other channels of communication,” said John Cabell, managing director of payments intelligence at J.D. Power.

That said, more than half (51%) of US credit card customers maintain revolving debt on their credit cards. Cardholders who carry over a debt balance from month to month have lower satisfaction by 54 points on a 1,000-point scale than those who pay their statement in full and are also more likely to switch their card providers in the next 12 months. In fact, the top reason cited for switching card providers is discontent with rewards, especially among cashback cardholders, seeking a better rewards program. This is off the back of greater concern around service charges and increasing interest rates. 

Although rising debt can mean more interest income for issuers, it is also important for them to maintain and increase stickiness, loyalty, and relationships down the line. In the same vein, issuers can assist cardholders in managing their debt in responsible ways by providing them with alternative repayment options. Consumers with debt across multiple credit products can also try to consolidate what they owe within a loan or line of credit that offers the lowest possible interest rate or credit card payment plans for large transactions if available. The earlier consumers and issuers act on these options, the better chance they can have of avoiding ballooning debt, damage to credit scores, and available credit limits. 

The study also highlights that consumers with annual card fees averaging $100 or more have the highest satisfaction with benefits and rewards. This offering seems to strike the right balance for cardholders between the cost of fees and the rewards and benefits offered, according to Cabell. Besides, rewards are psychologically effective tools for influencing behavior and are a driver of consumers' credit card choices. On the other side of the spectrum, cards with lower or no fees tend to have less valuable rewards and benefits, whereas cards with higher annual fees may come across as too expensive for consumers to justify their rewards and benefits.

There are now hundreds of credit cards targeting the younger generation desiring customized products. Many cards are now offered by digital-first fintechs, further intensifying the competition for banks and incumbent card issuers. Fintech issuers are coming up with appealing digital interfaces, personalized rewards based on consumers' locations and interests, and offer credit to individuals who may otherwise have a slim chance of getting traditional credit cards. As a result, the affinity and satisfaction for these products and brands are becoming particularly strong among younger users who prefer building credit to earning rewards.

Additionally, with alternative options like Buy Now, Pay Later (BNPL) making their way into the mainstream market, the possibility of card issuers losing share to BNPL providers is making the consumer-lending landscape more competitive. A portion of users are inclined toward loan installment plans as they can be easier and quicker to get than credit cards and often charge no interest if paid on time. Despite the fact that BNPL doesn’t offer rewards, almost half (41%) of the consumers lagging in financial stability are willing to consider a BNPL plan from a different lender in lieu of paying credit card interest, according to the report.