Slow recovery in credit card spending could take a heavy toll

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Since the coronavirus became widespread earlier this year, the credit card business has suffered and that could mean trouble for credit unions.

Consumers have been reluctant to pile on debt amid the crisis as millions were laid off and the unemployment rate spiked. As a result, overall credit card spending has plummeted. That means credit unions may have to deal with a hit to interest and fee income while grappling with a rise in delinquencies for credit cards.

“We see consumers find that using debit [cards] gives them more control over their finances, and they are more aware of the funds they have available to spend,” said Glynn Frechette, senior vice president with Advisors Plus at PSCU.

As stay-at-home orders were implemented and nonessential businesses were shuttered, credit card spending took a hit. Starting in March, this type of consumer spending declined by at least a quarter for several weeks compared with the same periods in 2019, according to weekly data from PSCU. For some credit unions, that could have meant a decline in interchange income.

Credit card spending has since recovered somewhat. It was down less than 4% for the 30th week of the year, which ended July 26, compared with the same week in 2019, according to PSCU.

But this area likely won’t recover to its pre-coronavirus levels until spending for entertainment and travel rebound. Credit card travel purchases were down roughly 60% for the week ending July 26, compared with a year earlier, while entertainment had declined more than 55%, according to PSCU.

“An important key [for credit card spending] to moving forward is the pickup in travel and entertainment sectors,” Frechette said. “As COVID-19 cases continue to grow at a high rate in various areas of the country, there is certainly risk of prolonged drag on travel and entertainment growth, as well as risk of renewed drag on goods and services if the COVID-19 numbers deteriorate and containment actions are taken.”

Navy Federal Credit Union in Vienna, Va., saw a 78% decrease in credit card purchases for air travel in June compared with last year, while lodging was down 52%, according to Meghan Gound, the institution’s vice president of credit cards. Credit card purchases for auto rentals showed signs of recovery but was only two-thirds of the amount last year, she added.

However, the $128.5 billion-asset Navy Federal has seen a spike in new accounts for its nRewards Secured Card in the second quarter.

Overall Navy Federal earned about $67 million during the second quarter, down about 85% from the same period a year earlier, according to call report data from the National Credit Union Administration.

Additionally, interest income credit unions earn from consumers carrying credit card balances should be lower than expected. Credit card holders used stimulus checks to pay down credit card balances, said Steve Rick, chief economist for CUNA Mutual Group. The record low mortgage rates also pushed households to refinance mortgages, with some paying down credit card balances after cash-out refinances, Rick added.

Credit union credit card balances totaled $60.8 billion in May, a drop of 3.4% from a year earlier and 1.3% from April, according to the July trends report from CUNA Mutual.

Finally, credit unions should brace for credit quality to take a hit. Millions of jobless Americans relied on the extra $600 weekly unemployment benefits to pay off debts. Many banks and credit unions also allowed cardholders to defer payments for months. An increase in delinquencies can be expected as these benefits lapse, according to Steve Reider, president of Bancography.

“We’re going to see a modest increase of credit card delinquencies in the short term,” Reider said. “I think the most challenging is yet to come.”

Moreover, credit unions tend to serve lower income consumers, who were hit harder in the pandemic and can take longer to recover from the economic recession, Reider said. After the Great Recession, the bottom 50% of Americans, as measured by wealth, did not regain their wealth until about 2018, almost six years after the top 1% recovered, according to data from the Federal Reserve.

The same could hold true after the current economic downturn.

“It is troubling for credit unions because their audience tends to move more toward the lower income segments, which have been much harder hit in terms of job loss and therefore, they will have higher incidences of late payments or default,” Reider said.

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Deb Wieczorek, vice president at CO-OP financial services, predicted that credit card usage wouldn’t return to pre-COVID-19 levels for at least a year. Facing the gloomy future, credit unions need to proactively adjust their credit card strategies, Wieczorek added.

“It is critical that credit unions ensure that the member is getting the right size of credit line based on their creditworthiness,” Wieczorek said. “We often see credit unions tend to be too conservative with their line assignments, prohibiting their members from using their cards, which typically have more attractive rates than national issuers.”

The pandemic might create an opportunity for credit unions to encourage members to use their debit cards, though the uptick in this type of card usage may not completely offset the lost interest and fee income from credit cards, experts said. Debit card spending has been up by double digits since June, PSCU data showed, with purchases of consumer goods, such as electronics leading the growth. For safety, some merchants opted out of cash transactions, pushing consumers to use debit cards as an alternative.

That means credit unions could focus on providing temporary rewards on categories, such as groceries and food delivery, that follow current trends in consumer spending.

Credit unions could also lose members if they are unable to provide robust digital services, such as mobile wallets and online card management tools, like their banking counterparts, Frechette said.

“If a credit union is less than satisfied in some way, as to the robust tools offered, go make a change, because members are going to demand access to bleeding-edge digital tools,” Frechette said.

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Credit cards Payment cards Consumer banking Debit cards Coronavirus PSCU Consumer lending