Why More Americans Will Fall Behind on Credit Card Bills This Year

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Our collective exercise in austerity appears to be over. Americans are adding to their credit card balances again, and experts warn more of us are likely to get in over our heads this year.

A quarterly report issued last month by the Federal Reserve Bank of New York said that, although our total debt dropped by $74 billion in the third quarter, our credit card debt actually rose by $2 billion in the same time period. Even as we’re paying down our mortgages (which is where that reduction came from), we’re hitting running up other debts. Credit card debt isn’t the only problem child here: We also added $18 billion in car loans and $23 billion in new student loan debt during the quarter.

The average borrower had $4,996 in debt as of the third quarter of 2012, according to credit bureau TransUnion. That amount is expected to rise to $5,446 by the end of this year, the highest it’s been since 2009, when our average debt topped out at $5,776.

So far, we’ve been able to stay on top of this rising debt load. New data from the American Bankers Association found that delinquencies on bank-issued credit cards were as low as they’ve been in nearly two decades in the third quarter of 2012. Don’t pat yourself on the back just yet, though; ABA chief economist James Chessen says this could change very quickly.

“The lack of broad-based improvement remains a cause for concern… slow job growth, continued uncertainty and falling consumer confidence could signal rising delinquencies in the year ahead,” he warns in a statement. The expiring payroll tax cut also means that the average household will have about $1,000 less in take-home income this year.

In a November forecast, TransUnion also said the percentage of people more than 90 days late on their credit card bills would creep up this year, in a large part because banks are once again signing up customers who are more likely to default on their debts. The number of subprime borrowers increased by more than five percentage points between 2010 and last year.

Why would banks court riskier and subprime customers when all the evidence says some of them are going to wind up not paying their bills?

For them, the trade-off is worth it. Credit cards make a lot of money for banks. They can’t rake in overdraft fees on checking accounts the way they used to, and the amount of interchange revenue they can earn on debit card purchases was capped by financial reform legislation. Interest rates held down by Federal Reserve policy limits the amount of money banks can earn from lending to each other.

But when it comes to credit card customers, it’s another story. “I think the card business is the most profitable on a product basis,” says Dennis Moroney, a research director at CEB TowerGroup who focuses on bank cards. Banks are borrowing at rock-bottom rates, then they’re turning around and lending at 10%, 12% or even more. And while they’re signing up more subprime customers, they’re not throwing caution to the wind the way they did pre-bust, Moroney says.

Plus, “It’s the gateway into the household,” Moroney says. Today it might be a credit card, but down the line, banks are hoping those borrowers will use other bank products and services like mortgages, small-business loans and wealth management advice.

Banks are especially eager to gain market share among millennials. This huge pool of consumers is only just beginning to realize its earnings potential, but hasn’t yet established a solid foundation of credit history, particularly since this generation is coming of age as it’s becoming tougher for college students to get credit cards.

In previous recessions, lenders relied on baby boomers to fuel the recovery, but that torch has been passed to their kids. “Their big challenge is student loans, but fundamentally, they are the future,” Moroney says. Increasingly, it’s a future banks are willing to bet on, even with the risk of a higher number of defaults.

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