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For Better or Worse, Americans Are Using More of Their Credit

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Banks offered people more credit when fewer Americans wanted to borrow. Now consumers are taking them up on it.

Lenders of course love to lend more. It is their core business, after all—especially when interest rates rise, enabling them to charge more. But right now is also a tough time for banks to be growing. The incremental cost of funding more asset growth is poised to jump as deposits get harder to come by, and as capital ratios tighten. Banks also have to reckon with how many of those loans will be defaulted upon. That is an especially tricky thing to forecast in the current economy.

There may be an optimal point that balances risk and reward. However, banks don’t entirely control how much lending they do when it comes to credit cards. Cards are a form of so-called revolving credit that consumers are approved for initially and can then use down the line. Earlier in the pandemic, people weren’t using these lines, or were immediately paying them down, reducing the interest earned on balances that carry over month to month.

People are starting to use their available credit more. U.S. consumer credit-card balances grew 15% year-over-year in the third quarter—the fastest pace in more than 20 years, according to the latest Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit, released earlier this month. That utilization rate of 21.5%—or the percentage of credit card limits represented by balances—was the highest since the first quarter of 2020. But that rate was almost 24% at the end of 2019. It could jump again during the fourth quarter holiday shopping season, as it usually does.

At the same time, some banks are now trying to tighten up the supply of credit, particularly to their riskier customers, according to survey data. Banks could cut customers’ credit limits, as they did early on in the pandemic. The net percentage of banks reporting tightening standards for consumer credit cards was above zero for the first time since the end of 2020 in the Federal Reserve’s October senior loan officer survey. In the July survey, banks reported that credit standards for subprime card customers were on the tighter side of the typical range, while they were on the easier side for prime ones.

The bottom line is that demand, rather than supply, might be in the driver’s seat in cards. Future card loan growth is likely “coming from existing customers drawing more on their credit lines,” says Autonomous Research analyst

Brian Foran.

Credit risk measures are “definitely rising,” but only moving toward more normalized prepandemic levels at this stage, he said.

Increasing utilization could mean that some consumers are exhausting their surplus cash. This could be useful to prop up consumer health in a mild economic downturn, but also a vulnerability for lenders in a deep recession.

Banks face tough choices on how and when to hit the brakes on cards.

Write to Telis Demos at [email protected]

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