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Chief executives rarely issue warnings when their business is thriving. However, JPMorgan’s CEO Jamie Dimon was justified in drawing attention to credit cards this summer. He informed investors, “We’ve been over-earning in credit for a substantial amount of time now. We’re quite conscious about it.”
While debt levels are on the rise, American consumers, flush with pandemic stimulus cash, had little trouble making payments in the past couple of years. As a result, credit card delinquencies and charge-offs remained unusually low in the second quarter of this year. This meant that banks like JPMorgan did not need to set aside significant loss reserves that could impact their earnings.
However, the credit cycle is now returning to normal. According to the Federal Reserve Bank of New York’s annual report on American households’ finances, US credit card balances exceeded $1tn for the first time in the second quarter of this year, a 16% increase from last year. This growth surpasses that of auto and student debt, as well as mortgages.
In addition, the New York Fed reported that delinquencies, specifically balances overdue by more than 30 days, have risen back to 2019 levels. Delinquency rates have doubled among individuals with the lowest credit scores since reaching their lowest point in 2021.
For banks, the over-earning pointed out by Dimon may already be starting to decline. Bank of America, for instance, has a credit card delinquency rate of 2.6%, which is only 40 basis points lower than in 2019.
The question now is how smoothly the US economy can navigate this situation. Research from the San Francisco Fed reveals that US households’ total “excess savings” peaked at $2.1tn in mid-2021 but has significantly decreased by March 2023, with an estimated remaining total of $500bn. This remaining savings could potentially prevent a sudden decrease in spending.
However, consumers still face challenges such as higher prices and increased debt servicing costs. Student loan forbearance policies have come to an end, and for those with credit card balances, the average interest rate has risen to over 20% from the mid-teens prior to the pandemic. These elevated carrying costs will soon eat into savings.
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