Beware: Credit Card Debt Increasing

Consumers are once again relying on credit cards to fund their expenditures, as the number of people who have a credit card has spiked to their highest level since 2005 during the first quarter of 2017, according to TransUnion, the Chicago-based credit bureau company.

Why is this important? Interest rates are expected to be on the rise.

Whether this is a sign that consumer spending is headed towards a crisis again is hard to determine yet, but more people have credit cards now. In the first quarter of 2017, 171 million consumers reported having at least one credit card, including 16 million subprime consumers.

A rise in consumer confidence because of a healthy economy and low unemployment could have led consumer borrowing to rise to $18.4 billion in May, according to the Federal Reserve, which is the largest gain since an increase of $25.1 billion in November.

While consumers who had trouble obtaining access to credit are able to get approved for credit cards now and do not have to rely on alternative lenders such as payday lenders with offering usury, some consumers are starting to accrue more debt once again. Lenders have loosened their lending requirements, giving consumers with lower credit score the ability to borrow at more affordable interest rates.

“People who don’t have pristine credit now have access to credit, which is a good thing,” said Jim Triggs, a senior vice president of counseling and support of Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization. “Consumers with subprime credit scores in the past recently had to rely on payday loans or pawn shop loans to borrow money.”

Delinquencies for credit cards remained in the first quarter of 2017 but rose to 1.69% of borrowers who are 90 days overdue on their payments compared to 1.5% in the first quarter of last year.

Access to credit will likely not tighten up unless delinquency rates rise substantially, Triggs said.

A stronger economy has lead to improved consumer confidence and higher credit card originations, said Jeff Golding, chief growth officer at IRH Capital, a Northbrook, Ill.-based financial company. Personal judgments from creditor or tax liens are no longer reported on credit histories, increasing the scores for many consumers.

“There is a change occurring on what is being reported at the bureaus and there is less of an impact,” he said. “It can raise people’s scores.”

The increase in some people using their cards may not emerge as a negative trend, Golding said.

“That remains to be seen,” he said. “We will know in six months whether this becomes an issue or if people are utilizing credit as they should be — obtaining the float on the money and paying it off each month.”

One caveat is that as interest rates rise, consumers saddled with large amounts of debt will face higher payments. A consumer who has a $10,000 balance with a 15% rate and is only making minimum payments will not pay off that debt for 17 years and will pay nearly $7,000 in interest.

Excerpt from The Street.

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