Mercator Blog

Expect More Conservative Credit Card Issuance in 2018 as the Lenders Face Increased Delinquency and Rising Interest Rates
Date: December 13, 2017
Brian Riley
Director, Credit Advisory Service

Bank credit cards, the lending and transacting products offered by domestic financial institutions, are risk-based products that permit a cardholder to transact on the payments network. Credit cards differ from debit and prepaid products because they require the issuing bank to extend credit to the customer. Since credit products generate fees, interest, and interchange, they are more profitable than debit cards, which rely on the presence of a deposit by the account holder, or prepaid cards, which require an account load. Credit cards earn income from interchange and fees.

Mercator Advisory Group’s report, The Credit Card Data Book: 12 Significant Indicators, reviews the performance of the general purpose bank card industry in the United States. The report focuses on the extension, collection, and operational risks of bank cards issued and governed by financial institutions accountable to the Federal Reserve System and the National Credit Union Administration (NCUA).

Credit cards are ubiquitous in the United States, with nearly 500 million general purpose cards in force at 130 million households and more than $1 trillion in outstanding debt on the financial books of 6,000 banks and credit unions.

Beyond the credit debt carried from month to month by households are the aggregate credit lines that facilitate cardholder accounts. Total open credit lines in 2017 amount to $3.5 trillion, slightly lower than the peak set before the 2009 recession. Both revolving debt and the contingent liability of open credit lines require issuing banks to maintain performance standards that ensure the account is kept current. Nonpayment will result in credit losses that directly affect an issuing bank’s profitability. Ideally, banks lose no more than 3.0% to 3.5% of their receivables to bad debt annually, but changes in household budgets and external economic factors can increase the loss rate and diminish credit card profitability. As the industry saw during the recession, if the loss rate increases, credit card businesses may not yield a profit and may generate potentially billion dollar losses to large financial institutions.