Image source: Flickr user Bryan Rosengrant.
The United States is very much a nation that runs on debt. From our federal government sporting an $18.2 trillion national debt to the average U.S. household carrying $16,140 in credit card debt as of October 2015, access to credit and the prudent use of credit are critical factors that affect our consumption-dependent GDP.
A dramatic shift is underway in the credit markets
But whether you realize it or not, a massive shift in the credit markets is underway. Despite $77 billion in new credit lines being opened in the first quarter of 2015, a jump of $6 billion from Q1 2014, the average new credit card limit per account is lower across the board according to a Credit.com report that used data from Experian.
Consumers who are highly coveted by credit issuers tended to see a minimal decrease in average credit limit per new account. People in the super prime category (a FICO score of 781-850) witnessed just a 0.6% decline in their average new account credit limit to $9,543 in Q1 2015 from $9,604 in Q1 2014. Prime customers (FICO score 661-780) saw a 3.2% decline to $5,209 from $5,382.
However, average and below-average credit consumers witnessed credit issuers pull in the reins on a year-over-year basis. Near-prime (FICO score 601-660) average new account credit limits plunged 8.8% to $2,277, subprime (FICO score 500-600) consumers' average new credit limits tumbled 17.5% to $966, and deep subprime (FICO score 300-499) consumers' average new account limits were slashed by nearly 26% to just $509.
This shift in the credit markets was also corroborated by Credit Karma using data supplied by TransUnion.
Graph by author. X-axis represents consumer credit score ranges. Data source: Credit Karma via TransUnion.
Note the differences between 2011 and 2015:
Graph by author. X-axis represents consumer credit score ranges. Data source: Credit Karma via TransUnion.
As you can see from the two graphs above, credit limits between 2011 and 2015 are nearly down across the board -- and this time it's very noticeable even for super-prime and prime consumers. Consumers with scores above 801 witnessed their average new account credit limit fall from $12,175 in 2011 to "just" $9,606 by 2015. Perhaps the only anomaly in TransUnion's data pertains to some near-prime and subprime consumers, which actually saw their average credit limits rise slightly when opening a new account.
What does this all mean?
What could this imply? It's tough to say at this point, but it would appear that lenders are once again worried about the health of the U.S. economy. If the latter is in good shape, banks will normally look to expand lending, especially to those who are most trustworthy, such as prime and super-prime consumers. Although banks opened more in new credit in Q1 2015 than in the prior year, the simple fact that average new account lending limits are falling is a possible sign that banks are genuinely worried about the economy and the health of the consumer.
Data from the Federal Reserve Board of Governors could help substantiate banks' fears (if this is indeed why banks curbed lending limits in Q1). As of the end of the second quarter, the delinquency rate on credit card loans for all commercial banks totaled 2.1%, the lowest level on record going back to 1991. In fact, credit card delinquency rates have now dropped in 24 straight quarters, which is great news for the nation's banks since it means they've been having to set aside less for loan loss reserves.
Gray vertical areas represent periods of recession. Image source: St. Louis Federal Reserve.
The quarter-over-quarter decline in delinquency rates from Q1 2015 to Q2 2015, however, was just a single basis point (2.11% to 2.10%). All prior sequential quarterly credit card loan delinquency declines had been for a minimum of four basis points (and often were much larger). In other words, the decline is flattening out, much like it did in late 1994 before delinquency rates rose by nearly 50% to a temporary peak of 4.78% in the fourth quarter of 1997.
There's little denying that current credit delinquency rates are well below their historic averages, and I don't believe it would be crazy to assume that they might normalize in the coming years. Rising delinquency rates would likely cause banks to boost their loan loss reserves, ultimately hurting profitability.
This upturn in delinquencies rates may already be underway based on reported third-quarter results from some of the nation's biggest credit card issuers. Capital One Financial reported in October that its 30-plus day delinquency rate rose to 2.95% from 2.65% in the sequential second quarter and 2.58% in Q1 2015. American Express also recorded a net write-off rate of 1.9% in its U.S. card operations in for the third quarter, which is up from the 1.7% net write-off rate it logged in Q3 2014. However, not every bank saw a degradation in credit quality -- albeit a decline in Capital One and AmEx, two notable credit card issuers, should merit some attention.
At this point, I don't believe it would be prudent to assume the gravy train for credit lenders has completely left the station, but as an investor, I would certainly suggest monitoring delinquency rates and new credit limits closely as the two are intricately tied at the hip. Tighter credit markets may not be terrible news for the U.S. economy as a whole, but it likely wouldn't bode well for banks.
