A Boom in Credit Cards: Great News for Banks, Less So Consumers

A Boom in Credit Cards: Great News for Banks, Less So Consumers

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Udean Murray, from Brooklyn, struggles each month to make the minimum payments for the credit cards she relies on. Her only income is Social Security.CreditAndrew Seng for The New York Times

By Jessica Silver-Greenberg and Stacy Cowley   Oct. 19, 2017

Udean Murray, a 62-year-old retired telephone operator in Brooklyn, relies on more than a dozen credit cards to make ends meet. Her prescription medication often goes on a Capital One card. She pays for groceries with one from Discover Financial Services

That’s a risky financial strategy for Ms. Murray, whose only income is Social Security and who struggles each month to make the minimum payments on all her cards.

But it has been a boon for the nation’s biggest banks, which are earning millions of dollars a month on their credit card customers. The four top American banks — Bank of America, JPMorgan Chase, Citigroup and Wells Fargo — together made more than $4 billion in pretax income from their credit card businesses from July through September.

The amount of debt owed by American consumers, which receded in the wake of the financial crisis, is again on the rise.

Outstanding credit card debt — the total balances that customers roll from month to month — hit a record $1 trillion this year, according to the Federal Reserve. The number of Americans with at least one credit card has reached 171 million, the highest level in more than a decade, according to TransUnion, a credit-reporting company.

That is occurring at an opportune moment for the banking industry, which is suddenly struggling to earn as much money from traditional profit engines.

In the years since the financial crisis, the largest United States financial institutions churned out profits largely thanks to a booming business in trading and structuring bonds and other securities. Advising corporations and other institutions on their finances and strategies was another lucrative revenue stream.

Now, though, those businesses are flagging, in part because financial markets have been eerily calm.

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Ms. Murray has to take dozens of medications to control pain and multiple sclerosis. Her prescription costs often go on a Capital One card.CreditAndrew Seng for The New York Times

So banks are turning more to lending to consumers — especially through credit cards — to pick up some of the slack.

Banks earn money from credit cards in two ways: They take a small cut of each card transaction as a fee, and they typically charge annual interest rates of 15 percent or more on balances that customers don’t pay off at the end of each month.

That business model is increasingly lucrative. Many consumers, their wages stagnant and their costs rising, are growing reliant on credit cards for essential goods and services, including medical and dental care. Across the industry, profits rose in the latest quarter.

At Bank of America, credit and debit card spending is up 7 percent this year compared with last. “Consumers are spending,” Brian T. Moynihan, the bank’s chief executive, told analysts on a conference call last week. The bank’s chief financial officer noted that the company’s cards business enjoyed better growth “than we’ve experienced in quite some time.”

Rivals are experiencing a similar surge. A strong consumer business, including card growth, helped JPMorgan increase its profits last quarter despite declines in traditional profit engines such as trading.

At Citigroup, an exclusive card deal with Costco — in which the bank provides branded credit cards to the discount-retail giant — has been “a real winner,” said John C. Gerspach, Citigroup’s chief financial officer. He said customers were spending more on their Costco cards and rolling over larger balances.

Such surprisingly strong performances — the four leading banks raked in a total of $21 billion in profits during the third quarter — helped propel shares of banks like JPMorgan and Bank of America to their highest levels in years.

Spending on plastic is part of a broader debt bonanza. In May, total household debt levels hit a post-recession peak of $12.7 trillion.

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Some of Ms. Murray’s cards. The number of Americans with at least one credit card has reached 171 million, the highest level in a decade.CreditAndrew Seng for The New York Times

The rising numbers reflect a growing economy and a robust financial system able to provide credit to people who need it, banking officials and analysts say.

“Delinquencies on credit cards have stayed remarkably low for five years. They’ve been well below their historical averages,” said James Chessen, the chief economist for the American Bankers Association. “We attribute that to consumers continuing to be very smart about how they use their cards, and very careful about how much debt they take.”

But what’s good for banks and their shareholders isn’t necessarily good for all bank customers.

Cynthia Regis, 73, worked for more than two decades as a home health care aide but has virtually no savings. To help pay her electric bill and to buy groceries, she racked up a balance of more than $6,000 on a Discover credit card. The annual interest rate is 29 percent, which makes it hard for her to whittle down her outstanding balance. One month this year, for example, her payment of $159 mostly covered her interest payments, shaving only $5 off her total debt.

“I’m barely making it,” Ms. Regis said.

Many Americans have seen their savings winnowed by a combination of the recession and stagnant wages. Almost half of adults said they could not pay for a $400 expense without selling something or borrowing money, the Federal Reserve has found. Some 44 percent of people with credit cards are currently carrying a balance, according to the American Bankers Association’s latest quarterly analysis, up 1.7 percentage points from the same period two years ago.

Older Americans, like Ms. Regis and Ms. Murray, living on a fixed income, are turning to credit cards to make ends meet, according to economists, lawyers and other experts.

“These cards are a social safety net,” said Charles Juntikka, a bankruptcy lawyer in Manhattan. He said he had seen thousands of clients made insolvent by a single unexpected cost.

For borrowers with shaky credit, interest rates can near 36 percent. Some borrowers end up owing more in interest than they originally spent on their cards.

Just making the minimum monthly payments on her cards costs Ms. Murray $500. That eats up more than half of what she receives from Social Security.

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“These cards are a social safety net,” the bankruptcy lawyer Charles Juntikka has said.CreditAndrew Seng for The New York Times

The cost to borrowers is creeping upward. The average interest rate on new credit card offers currently hovers at 16.15 percent, the highest level in at least a decade, according to data collected by CreditCards.com.

For banks, this is especially welcome because relatively few borrowers appear to be at risk of default. That means the banks pocket big fees and interest payments with minimal costs.

“A lot of the signs we look for in terms of the deterioration of the consumer, I’ve got to say, right now, we just don’t see,” Michael L. Corbat, Citigroup’s chief executive, told analysts last week. “We would rate the health of the consumer right now as pretty good.”

But a few small cracks are starting to show. Most of the major banks increased the amount of money they put aside to cover possible credit-card defaults in the most recent quarter. The recent spate of natural disasters, including Hurricanes Harvey and Irma, took a toll, and all of the banks expect to see their rate of defaulted loans rise in the coming months.

A recent analysis of Federal Reserve data by the debt-rating firm Moody’s found that working-class families, those with a median income of about $33,000, were starting to spend a higher portion of their income — slightly more than 15 percent — on debt payments, compared with what they spent three years earlier. As other expenses like health care and housing rise, more of those families are at risk of falling behind on their debts, it warned.

Pearline Rivers-Sobers got a credit card from Synchrony Financial at a local chiropractor when her late husband needed treatment that she couldn’t afford. The card later came in handy when her son needed glasses. Then she got another and another. Soon her wallet was stuffed with cards from CareCredit, Modell’s Sporting Goods, Linens ’n Things, Toys “R” Us, Sleepy’s and Old Navy. (Despite the logos they carry, those cards are also issued by banks.)

For a while, she kept up on payments, even managing to pay off two cards. But she has fallen behind on payments to at least five different banks, including Citigroup and Capital One.

“I was spending each month scrounging together money that basically did not even pay the interest,” Ms. Rivers-Sobers said.

Now, she said, she is preparing to file for bankruptcy. The banks that issued her the cards are likely to receive a fraction of what she owes them.

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