People seeking to evade legal usury: credit card balances, delinquencies, third-party collections, and second-quarter bankruptcies

Buy-Now-Pay-Later (BNPL) lenders face a tougher reality.

By Wolf Richter for WOLF STREET.

Credit card balances increased by $ 46 billion to $ 887 billion in the second quarter, which was still down 4.3% from the peak of the fourth quarter 2019 and was only a whisker above where they had been in 2008, despite 14 years of population growth and inflation. Frenzied inflation is responsible for much of the increase in the second quarter, according to the New York Fed Household Debt and Credit Report.

Credit card balances also include balances that are paid on the due date the following month, every month, so they don’t accrue interest. Many Americans use credit cards solely as a payment method (and to collect 1.5% repayment or otherwise) and not as a loan method.

A report by Fitch estimated that the total amount paid with credit cards for goods and services in the United States reached $ 4.6 trillion in 2021, which would be an average of $ 1.15 trillion in credit card purchases at quarter.

However, total credit card balances outstanding in the second quarter only grew by $ 46 billion, which shows the extent to which credit cards are used as a payment method and to what small extent they are used as a loan method. , which makes sense, given the usurious interest rates.

Credit card balances of $ 887 billion in the second quarter include transactions incurred roughly in June but paid in July that are not accruing interest. And this has been helped by the surge in travel, many of which are paid for with credit cards.

Other consumer loans, such as personal loans, paycheck loans, and Buy-Now-Pay-Later (BNPL) loans, all combined, rose to $ 470 billion in the second quarter, below where they were 20 years ago. despite 20 years of inflation and population growth.

Trying to avoid the rip-off of usurious interest rates: lessening the importance of credit card debt.

People borrow a lot of money to finance home and car purchases, where loan balances have increased since 2008; and they are taking out a lot of student loans, whose balances have risen relentlessly since 2008.

But to avoid being ripped off by usurious interest rates, people have practically held back when it comes to credit cards, especially the huge amounts that are paid in full each month and never accrue interest.

Credit card balances and other combined loans accounted for more than 16% of total consumer debt (including mortgages, auto loans, student loans). During the pandemic, this value dropped to 8% and reached 8.4% of total debt in the second quarter:

A word about buy now pay later (BNPL)

Data from the New York Fed does not circumvent BNPL loans. But Fitch estimates that in 2021, $ 43 billion (with a B) in purchases was made using BNPL loans, compared to $ 4.6 trillion (with a T) in credit card purchases in the United States. So BNPL loans are tiny, but they grow rapidly.

BNPL loans, which often cater to subprime-rated customers, are short-term installment loans, such as an advance and three more due, typically spread over six to eight weeks. These loans are often issued at the time of purchase. They typically carry 0% interest and are subsidized by the retailer to encourage larger average tickets and fewer cart abandonments. Resellers can partner with a BNPL lender.

If this sounds like the installment plans from decades ago, it is because it is what it is, but is now imbued with the infallible aura of FinTech and AI.

One of the most advertised specialty BNPL lenders in the United States is Affirm Holdings [AFRM], a startup with less than $ 1 billion in revenue in 2021. It went public in January 2021 amidst immense hustle and bustle. In October, its stock reached $ 176.65, after which it tumbled to the IPO price of $ 49 per share and today closed at $ 31.55 per share, down 82% from the high.

The company lost a great deal of money every quarter, including $ 55 million in the first quarter and $ 430 million last year.

According to Fitch, BNPL lenders “have seen default rates more than doubled in recent quarters,” while credit card default rates have just risen, as subprime-rated customers taking out BNPL loans are the hardest hit by the furious inflation.

And as so many times with foolproof FinTechs and AI, credit checks are only as good as the people who wrote the code, and apparently the code was designed to maximize revenue, not risk control. Thankfully, this is only a small part of the consumer credit scenario.

Credit card defaults rise from historic lows, remain low.

There is still a lot of money out there, but some people are starting to run out. In 2020 and 2021, people used their stimulus checks and PPP loans, and extra unemployment benefits plus some of the money left over from not having to pay their rent or mortgage, to keep up to date with their credit cards. And default rates across the board have fallen to all-time lows.

For credit card defaults, the all-time low was in the third quarter of 2021, when outstanding balances for 30 days or more fell to 4.1% of total credit card balances. Then they start to rise. In the second quarter, they climbed to 4.8%, which is still below any pre-pandemic low.

For “other loans”, the record low of the default rate of more than 30 days was in the fourth quarter of 2021, at 4.3%. In the second quarter it rose to 5.2%.

In both categories, default rates are on the rise but are still below the Good-Times norm. Credit card defaults are increasing faster and may soon reach the normal of good times and then the normal of not-so-good times. A severe employment crisis, such as during the Great Recession, will result in a steep rise.

Notice how pandemic stimulus payments of all kinds and the ability to skip rent and mortgage payments have pushed default rates down through mid-2021. But that game is now over and there is a trip back. in reality. This is a very similar trajectory to auto loan default rates:

And the first increase in third-party collections.

The percentage of consumers with third-party collections rose to 6.3% in the second quarter, less than half compared to 2013 (14.6%). So far, so good:

The average per capita collection amount has remained broadly stable at around $ 1,230 over the past three quarters, after declining during the stimulus era:


The number of consumers with new bankruptcies in the second quarter rose to 95,200 but remains at an all-time low, following the long downtrend that began in 2010 when bankruptcies peaked during the Great Recession. Also note that the number of people who filed for bankruptcy in the second quarter was less than half the number of people who filed for bankruptcy in 2006, the lowest point just before the Great Recession.

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