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The revolution will be pre-approved: US credit card debt reaches $1 trillion

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By: RickFerguson |

Posted on May 23, 2016

The Wall Street Journal reports good news that comes with certain caveats. The good news: banks are issuing credit again, with much of that new credit card spend driven by rich activation offers and rewards. There's so much credit out there, in fact, that  total US credit card debt is poised to surpass $1 trillion before the end of the year. The caveat: much of that debt has been issued to sub-prime credit card holders.

The rise in credit card debt is chronicled in a recent Wall Street Journal article, which reported that U.S. national credit card debt has reached $952 billion and is on pace to pass $1 trillion this year - the highest total since 2008. That's actually good news; high employment means that consumers are spending more, and banks are comfortable in knowing that flush consumers will be able to pay off all that additional debt. Indeed, the credit card industry is enjoying healthy profits, with the Journal reporting that credit-card returns on assets will reach 4.25% to 4.50% this year, compared to 4% in 2015.

But there is a potential watch-out for the industry: banks are issuing much of that debt to sub-prime borrowers. Money quote from the Journal:

"Because many creditworthy consumers are still cautious about spending, lenders are turning more aggressively to subprime borrowers. Lenders issued some 10.6 million general-purpose credit cards to subprime borrowers last year, up 25% from 2014 and the highest level since 2007, according to Equifax.

Also evident in the Journal report is the degree to which rich reward offers are driving all of this new credit card spend. Money quote #2:

"The new plastic comes with richer perks. Just a few years ago, new customers who received Chase's popular co-brand card with United Airlines received 30,000 miles and other perks. The lender now is offering 50,000 miles on its British Airways card, with a chance to pump that up to 75,000 miles. In another popular perk, creditworthy borrowers can now receive cash-back bonuses of as much as 5% in certain categories, compared with longtime standards of 1%."

The only risk, of course, is that economic headwinds cause sub-prime borrowers to default and raise the specter of another banking crisis. In the meantime, however, let's all enjoy the fruits of a healthy, profitable credit card industry and the rich rewards they're passing on to consumers. Let's just hope they don't all want to redeem for a free flight to Cabo at the same time.

- Rick Ferguson

 

 

More Info: 

http://www.wsj.com