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Credit Card Market Expanded in Q4 2018

Credit card use continuted to expand in the fourth quarter of 2018, according to the American Bankers Association’s latest quarterly Credit Card Market Monitor. Compared to the previous quarter, purchase volumes increased for super-prime (+2.7 percent) and prime accounts (+1.4 percent), but declined modestly for subprime accounts (-0.9 percent). On an annual basis, purchase volumes increased across risk tiers, particularly among subprime (+9.1 percent, or $18/month) and super-prime accounts (+8.6 percent, or $54/month).

The April 2019 Monitor, which consists of credit card data from October through December 2018, also found that the number of new accounts (those opened in the previous 24 months) decreased 4.9 percent on an annual basis. This decline reflects sharp decreases in new subprime (-11.1 percent) and prime accounts (-7.0 percent), while new super-prime accounts held steady and remain near post-recession highs. The total number of open credit card accounts rose 1.5 percent in the fourth quarter compared to year-ago levels, driven by the super-prime risk tier, which comprised over half of all accounts for the 29th consecutive quarter.

While average credit lines grew across risk tiers, they remain 10-25 percent below recession-era highs. Among new accounts, prime credit lines experienced the strongest quarterly growth (+1.5 percent) after declining in each of the prior three quarters.

“Consumers continue to exhibit good payment behavior overall, and issuers are responding by slowly increasing credit lines,” said James Chessen, ABA’s chief economist. “At the same time, issuers are slowing the pace of new account generation, particularly for subprime and prime borrowers, as they continue to closely monitor economic trends and consumers’ financial health.”

Consumers Maintain Diligent Credit Card Use

The Monitor also found that credit card debt as a share of disposable income rose 8 basis points to 5.50 percent in the fourth quarter, reflecting seasonal spending patterns, but is 5 basis points below its year-ago level. Meanwhile, the effective finance charge yield (which measures interest payments relative to total outstanding credit in the market) increased 24 basis points to 13.04 percent in the fourth quarter, mirroring the Federal Reserve Board’s interest rate hike in December that increased the cost of credit. Since late 2015, the Fed has raised its benchmark rate 225 basis points, while the effective finance charge yield has increased 195 basis points over the same period. The slower increase suggests that an improvement in consumers’ ability to manage credit card debt has partially offset the impact of rising interest rates.

Shares of transactors (those who pay their monthly balance in full each month) and revolvers (those who carry a monthly balance) both rose 0.2 percentage point in the fourth quarter, while the share of dormant accounts declined 0.4 percentage point. Notably, the share of transactors reached its second highest level since 2008 and has exceeded 30 percent for three consecutive quarters, reflecting sound financial conditions for many U.S. consumers.

“Credit card debt remains very low relative to income, which demonstrates consumers’ diligence in managing their financial obligations,” added Chessen.

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