Credit Card Use is Growing — But Not For Subprime Borrowers

July 25 – Credit card use continued to expand in the first quarter, according to the American Bankers Association’s latest Credit Card Market Monitor. Monthly purchase volumes rose 3.3 percent on a year-over-year basis for prime and super-prime accountholders, but dipped slightly for subprime borrowers. Compared to the prior quarter, monthly purchase volumes fell 7–10 percent across risk tiers, reflecting the regular post-holiday decline as well as relatively weak consumer spending in the first quarter.

The July Monitor, which reflects credit card data from January through March 2017, also indicates that the number of new accounts (those opened in the previous 24 months) increased 8.8 percent in the first quarter compared to the same period a year earlier, consistent with a continually strengthening labor market. New subprime accounts grew the fastest among the three risk tiers (up 11 percent year-over-year), but comprise the smallest share of accounts created.  Prime and super prime new accounts both grew by 8 percent compared to the first quarter of 2016.

“A stronger labor market continues to serve as a bright spot in the U.S. economy, putting more Americans in a better position to establish and build credit,” said Jess Sharp, executive director of ABA’s Card Policy Council. “Issuers are responding to consumer demand by extending credit access to more people, but at lower credit lines that can increase over time with a good payment history.”

The report also found that the effective finance charge yield — which measures interest payments relative to total outstanding credit in the market — increased to 11.76 percent, up 28 basis points compared to the previous quarter. This increase is consistent with the Federal Reserve’s decision to raise the federal funds rate by 25 basis points at the end of 2016, and is similar in size to the increase that occurred after the Fed raised rates at the end of 2015.

“Market interest rates on loans tend to mirror what the Federal Reserve does, as the Fed’s goal is to tighten credit ever so slightly,” Sharp said. “Nonetheless, the effective finance charge is likely to remain well below post-recession highs this year.”

The share of “Revolvers” (those who carry a monthly balance on their card) also edged up 0.3 percentage point in the first quarter to 44.0 percent. Revolving accounts typically increase in the first quarter due to seasonal spending patterns, and the current share remains below the recession peak of 48.4 percent in 2009. The share of accountholders who pay their balance in full each month (“Transactors”) fell 0.3 percentage point to 28.8 percent of all accounts, while 27.2 percent of accounts were dormant.

Consumers continue to demonstrate good payment behavior even as credit card usage expands. As a share of disposable income, credit card credit outstanding declined 13 basis points to 5.3 percent in the first quarter, and has remained below 5.5 percent since 2012.

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