Daily Management Review

Millennials Boosting Credit Card Industry Revive In US, But Banks Cautious


The younger population in the United States has again boosted the credit card industry of the country.
Since the global financial crisis of 2008, there was a decline of the popularity of credit cards especially among consumers in their 20s even though it has been amongst the most popular consumer credit products. This decline was mostly because banks started to withdraw their credit lines and implemented stricter approval norms. Further, US lawmakers also issued directives for a host of changes to the banking industry so that there is a curb on the predatory credit-card lending.
That resulted in a significant drop in the demand for credit cards especially among those in their 20s – and according to the Federal Reserve Bank of New York, dropping from 55 per cent having an open account precrisis to 41 per cent in 2012.
But slowly with the bettering of the economy, the lending criteria of the banks were relaxed – launching rewards cards that offered a range of free travel. That reportedly started to attract the young millennials.
Now, according to the Fed, accounts have been opened by 52 per cent of consumers in their 20s while the overall credit-card prevalence increased to 60 per cent. At the end of 2018, a record $870 billion was achieved by the total credit-card debt in the US.
However, the issue that banks face with the younger borrowers is that compared to the more seasoned, career-steady consumers, they tend to be less responsible. This is indicated by the rising percentage of credit card defaults - especially among 20- to 29-year-olds.
"Credit card delinquency rates have been trending upward in the past few years - likely reflecting, in part, the increased presence of younger borrowers in the credit card market," the Fed wrote in a recent report.
The emergence of this trend has therefore generated nervousness among a section of card issuers nervous. This has prompted some card issuers to cut down on their ambitions and making account opening norms stricter.
Their credit-card lending standards had been tightened in the first quarter, said more than 15 per cent of senior loan officers in the Federal Reserve's latest survey. About two years ago, banks started getting stricter with the rise in trends of defaults and delinquencies. But according to Warren Kornfeld of Moody's, this is the largest shift since 2009.
Card companies "understand where we are in the credit cycle, and they don't want to be doing things now that will come back to haunt them when we eventually have that down cycle," Kornfeld said.
Those accounts that have little or no activity are also being closed down by card companies. This is because the banks do not want customers to hoard credit until they face financial distress. Credit card issuers are also cutting down on new-balance transfers – a system that allows a consumer to shift outstanding credit-card debt to a different issuer for 0 per cent teaser interest rate as an introductory offer. Issuers say that this product carries higher risks and less benefit for them as they are set to head into an economic environment where in the likelihood of consumers defaulting are high.
"Especially when you're in late cycle, you do have to be concerned about focusing on customers where you're only going to make money when the economy does well," Kornfeld said.