Credit card default rates are typically higher than most other loan categories for a number of reasons, including the fact that credit cards let people spend more than they make. But during a recession, credit card defaults can really spike because unemployment jumps and people suddenly don't have enough money to pay all of their debt.
To get an idea of how many American consumers might face this problem during the coronavirus pandemic, we can take a look at all of the major credit card companies to see how they are projecting loan losses in their credit card portfolios.
Credit card loss projections
Some of the largest credit card companies in the world include JPMorgan Chase, Citigroup, Capital One Financial, American Express, Discover Financial Services, and Synchrony Financial. There are others, but these are some of the largest ones when it comes to total credit card loan volume.
|Company||Credit Cards ALLL* (millions)||Total Credit Card Loans (millions)||ALLL/Credit Card Loans|
|JPMorgan Chase (NYSE:JPM)||$17,800||$141,656||12.6%|
|Capital One Financial (NYSE:COF)||$12,091||$107,310||11.3%|
|American Express (NYSE:AXP)||$6,600||$74,600||8.8%|
|Discover Financial Services (NYSE:DFS)||$6,500||$70,201||9.3%|
|Synchrony Financial (NYSE:SYF)||$9,802||$75,353||13%|
As you can see, these six companies are each setting aside anywhere from $6.5 billion (Discover) to $17.8 billion (JPMorgan) just to cover potential loan losses that could materialize in their credit card portfolios sometime in the future. The losses these six companies are setting aside range from 8.8% (American Express) to 13% (Synchrony) of their total credit card portfolios, as of June 30.
These are just projections and actual losses are still relatively small right now, as government intervention including $1,200 stimulus checks, the Paycheck Protection Program, and enhanced unemployment benefits have likely delayed some of the pain. Although these projections are conservative and may not actually materialize, this is what these companies think could happen under certain circumstances. But there is still a lot of uncertainty.
What does this mean?
Collectively, these six companies have set aside about $69.2 billion in reserves to cover potential future losses in their credit card portfolios. The Federal Reserve recently reported that total outstanding revolving debt, which mostly consists of credit card debt, amounted to $995.6 billion in May, the latest month for which data is available. That means these six companies alone have set aside reserves to cover nearly 7% of total outstanding revolving debt ($69.2 billion/$995.6 billion). This equation is not exact, as the $69.2 billion in reserves is as of June 30, while the total revolving debt is data from May. Also, there are many other companies that issue credit card debt so the actual reserve coverage percentage is probably a lot higher. After all, some of the companies mentioned above have set aside reserves amounting to 12% or 13% to cover losses in their total credit card portfolios.
If you look back during the Great Recession, charge-off (debt unlikely to be collected) rates on credit cards at all commercial banks peaked in the fourth quarter of 2009 at a whopping 10.51%.
I believe this tells us that if scenarios play out as many of these large credit card companies suspect, in some scenarios we could could definitely see credit card losses get as high or higher than during the Great Recession.
Wide range of potential results
As I mentioned above, I imagine that many of these current credit card loss projections are likely conservative, which is how banks and other financial service companies should be thinking. But we just don't know when there will be a coronavirus vaccine effective enough to essentially end the pandemic, and therefore allow everyone to resume their normal lives. We also don't know if states will need to implement shelter-in-place orders again to prevent the spread of the virus. These orders, while necessary, can be devastating to the economy and could result in higher financial losses than anyone ever imagined. So, we could end up seeing actual credit card losses much lower than current projections, and in certain worst-case scenarios, they could probably also exceed those projections as well.