US consumers are continuing to pay down their credit cards as the pandemic crimps spending opportunities, leaving banks fretting over the outlook for one of their most profitable businesses.
Total card loans held by US banks stood at $755bn in the last week of October, according to the Federal Reserve — $100bn lower than when the pandemic took hold — and balances have drifted lower in three of the past four weeks.
“Consumers are not spending on restaurants and movies, and a big chunk [of the decline] is travel, too,” said Matt Komos, vice-president of research at the credit agency TransUnion, which collects data on every card account in the US.
He said government stimulus cheques, supplemental insurance benefits and the availability to take payment holidays on mortgages had all helped consumers to pay down their balances.
“We used to see a pretty good surge around the holidays but our survey suggests there is a lot of hesitancy [to spend],” Mr Komos said. “I would be surprised if it was a weak Christmas, but it is really hard to forecast.”
The number of Americans opening new card accounts has fallen sharply, too, to 8.6m in the third quarter, down almost 50 per cent from the year before, according to TransUnion.
The decline in card loans has already had a major impact on US banks, for whom cards, with their high interest rates, are a key driver of profit.
Card revenue at Citigroup, one of the banks most dependent on its card franchise, fell 18 per cent in the third quarter from the year before, the result of a 10 per cent decline in spending and 12 per cent decline in loans. Card profit was down 30 per cent. Cards account for a quarter of Citi’s revenue and a larger slice of its profits.
“As goes Covid, so goes credit card spending” said Mike Mayo, bank analyst at Wells Fargo. “For bank profitability, that means pain — but it should be transient pain, lasting until the war on Covid is over.”
Mr Mayo predicted a “dark winter ahead” for banks, followed by a much brighter summer.
TransUnion data show that, across the US, average credit card balances stood at just over $5,000 at the end of September, down from about $5,700 a year earlier.
The outlook for the fourth quarter depends in part on the trajectory of the economy as Covid-19 cases surge to new records, and on consumer confidence against that backdrop.
Supplemental unemployment benefits expired in the summer and other federal funding for the jobless is set to run out at the end of the year, and there is no immediate sign of progress towards a new fiscal stimulus package in Congress.
Card use may soon rise, said Ioana Marinescu, a professor of economics at the University of Pennsylvania’s School of Social Policy and Practice.
“You have to distinguish income levels — the people not spending much are people at higher-income levels because a lot of what they spend is on flying and so on,” she said.
“Lower-income people have gotten a big income boost, but now that federal aid is expiring we can expect credit card balances to increase.”
Because of the burden of interest payments, spending on credit will reduce total consumption, Ms Marinescu said, at the same time as state and local authorities are putting in new lockdown measures to curb the rise in Covid-19 cases.
“We are going into a dark period not only for lower-income people but for businesses,” she said.
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