Banks are issuing credit cards like it’s 2007
Americans are binging on credit cards like it’s 2007.
For years consumers have been shredding their plastic, banks have been reining in lending, and debt-phobic millennials have been paying their bills with debit cards. Now, credit cards are back.
So far this year, banks have issued new credit cards at a rate unseen since before the 2008 financial crisis, which triggered an avalanche of bad debt. Revolving debt, primarily credit cards, has been climbing, nearing $975 billion in August, with analysts expecting it to reach a pre-crisis peak of more than $1 trillion by early next year.
Meanwhile, the card rewards wars are heating up.
If you’re looking to fly to Reykjavik on the cheap, check in for a free stay at the Ritz-Carlton Hotel, snag a seat at the Emmy Awards, or earn some cold, hard cash, your best bet these days may be a credit card.
Banks and financial institutions are piling rewards onto their credit card offers, hoping to lure consumers, especially the affluent and middle-class. Many are offering tens of thousands of points to eligible customers and tripling them to be redeemed for free flights, hotel stays, concierge services, and cash back.
“If you have decent or better credit there’s never been a better time for you,” said Tim Kolk, owner of TRK Advisors LLC, a credit card consulting company in New Hampshire. “Everyone who wants a credit card has one, so it’s about stealing other people’s business. With all the folks escalating what they’re bringing, if you don’t do it you’re going to lose market share, and that gets executives fired.”
Many banks are eager to push credit cards as a healthier economy prompts Americans to spend more, low interest rates dampen bank profits on other loans, and more careful borrowers stung by the recession have kept credit card loan delinquencies at their lowest rate in 25 years.
Through July of this year, banks issued nearly 39 million credit cards, a 16 percent increase from 2015, and the highest level in nine years, according to Equifax Inc.
As banks compete with each other, some investors and shareholders are worried that these rewards may be getting too rich, eating away at profits, and that consumers may soon reach their limit on debt, triggering bad times once again.
“We’re seeing an arms race among issuers,” said Matt Schulz, a senior industry analyst with the consumer website Creditcards.com. “These balances can’t keep growing forever without some difficulties arising from them.”
But for now, the benefits attached to opening a new credit card are proving to be too enticing for many.
Jon Strauss, 40, of North Andover has been an American Express cardholder for years. But when he was booking a recent vacation he came across a Barclay’s Bank offer with JetBlue Airlines that included 30,000 points after spending $1,000 in three months and other incentives that he couldn’t resist. Within a few months, Strauss said, he has accumulated about 65,000 points, more than enough for two roundtrip tickets to destinations such as Cancun.
Strauss said he is making sure to pay off his balances on both cards every month to avoid interest payments and keep his costs low.
“If I’m going to spend the money, I might as well get something out of it,” he said. “As soon as there’s a diminishing return, I’ll switch.”
In August, New York-based JP Morgan Chase & Co. introduced its Sapphire Reserve credit card, with 100,000 points, the equivalent of $1,500 toward airfare, hotels, and other travel, if the borrower charges $4,000 within three months. The card has a steep $450 annual upfront fee, which can be reduced with the card’s $300 reimbursement for travel-related charges.
The card went viral and the bank hit its full-year adoption goals in the first two weeks, with the much-sought-after millennials making up a large share of new card holders, according to Amy Bonitatibus, a spokeswoman for Chase.
The bank has even tapped late-night television show host James Corden for a series of videos pitched to younger travelers.
Other financial institutions are offering richer cash back rewards, including Illinois-based Discover Financial Services, with up to 5 percent on certain categories throughout the year, and Boston’s Fidelity Investments, with 2 percent on all items charged.
These enticements are working.
Chase’s credit card sales volume was up nearly 10 percent in the three months ending in September, compared with the same time in 2015.
Bank of America last week reported that in the third quarter of the year it had issued 1.3 million credit cards, the highest number since 2008.
For the large banks that dominate the market, the credit card business can be lucrative. While new banking rules put in place following the financial crisis restrict overdraft revenue and cut into swipe fees for debit cards, regulators didn’t put as many fee limits on credit cards.
The income banks earn when consumers swipe their credit cards at retailers grew by more than 50 percent, from $18.5 billion in 2009 to $28.1 billion last year. Debit card swipe fees grew at about half that pace and overdraft fees fell by 12 percent during that period, according to Mike Moebs, owner of Moebs Services Inc., an Illinois-based bank consulting firm.
The number of credit card payments that are 30 days late hit 2.2 percent in the second quarter of this year, down from a peak of 6.8 percent in 2009 and among the lowest levels since the Federal Reserve started keeping track in 1991, making credit cards a safer bet for banks.
But as banks push credit cards, they are also preparing for potential losses. Chase, for example, set aside 13 percent more for losses in its most recent earnings report, compared with the same time in 2015.
Bank of America is debating how to increase its card business, while focusing rewards on customers who already have other accounts with the bank, said David Tyrie, who oversees consumer products.
“We’re really about relationship rewards not acquisition rewards,” Tyrie said. “I don’t get worried about headlines — here’s a new feature on this card and that card.”
Still, the competition isn’t likely to cool off any time soon, analysts said.
“At least not until the credit quality of the borrowers or the economy changes,” said Kolk, with TRK Advisors.