Credit card losses have been steadily increasing in recent months and Goldman Sachs analysts predict this trend will continue through late 2024 and into 2025. This projected rise in losses is unusual since they typically only surge during economic downturns. However, high consumer debt levels, inflation, and interest rate hikes are driving losses even in the absence of a recession.
Why Credit Card Losses Are Rising
Total U.S. consumer debt hit $16.15 trillion in Q1 2023, while credit card debt alone tops $1 trillion – both record highs. With debts so elevated, any financial shock can push consumers into delinquency or default. Meanwhile, rampant inflation is forcing households to lean more heavily on credit cards to afford basics like food and gas. Finally, the Federal Reserve’s campaign of interest rate hikes has led to pricier credit card borrowing.
When Losses Will Peak
Goldman Sachs expects credit card charge-offs to peak in late 2024 or early 2025 before gradually declining. However, they caution that loss rates could stay well above pre-pandemic levels for several years post-peak. Other analysts also point to 2024-2025 as the apex for losses. This projection is based on rising delinquencies today that will eventually transition into defaults down the road.
How Consumers Can Protect Their Finances
To prepare for further increases in credit card losses, consumers should pay down balances as quickly as possible. Avoid taking on new debt, create a budget that reduces overspending, and shop around for cards with lower interest rates. Seek credit counseling if struggling with debt, and leverage debt management resources. Building emergency savings is key to weather financial shocks without credit.
How Credit Card Companies Can Limit Losses
Card issuers are employing tighter lending standards, building reserves, and working with distressed borrowers. Restricting credit access to higher-risk applicants can limit future losses. Increasing bad debt provisions ensures adequate capital to absorb charge-offs. Payment plans and interest rate reductions incentivize struggling customers to avoid default. While losses are still expected to rise, prudent risk management can soften the blow.
The projected surge in credit card losses highlights the precarious state of consumer finances. Individuals should shore up their budgets and debt loads now before losses potentially climb higher. Card issuers face a delicate balancing act between limiting losses and providing credit access. How well all parties navigate today’s challenges will determine the scale of future charge-offs.
