Looking back at a cautious year in credit cards

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If I had to pick one word to describe the credit card industry in 2019, it would be cautious. We’re more than a decade into the longest economic expansion in U.S. history. Many believe what goes up must come down, so that alone has caused a lot of worry. And it’s not just the law of averages that suggests a recession could be looming.
The yield curve inverted briefly in March and then consistently from May to October (that is, the 10-year Treasury yield minus the 3-month Treasury yield). In plain English, this means investors were earning a higher rate from 3-month securities than 10-year bonds, which isn’t how it’s supposed to work. All else being equal, there’s a lot more risk associated with tying up your money for 10 years than three months, so you’d expect the 10-year investment to earn a higher return.
But with worries about trade wars, slowing global growth and numerous other uncertainties, investors pushed down the 10-year Treasury yield. Short-term rates are set by the Federal Reserve, and the Fed raised the federal funds rate 225 basis points from 2015-18 in response to sustained growth and low unemployment. This ended the extremely low interest rate policy initiated during the Great Recession. The rate hikes were also intended to limit inflation and to prevent asset bubbles from forming.
During the second half of 2019, the Fed reversed course with three rate cuts totaling 75 basis points, which first stabilized and later steepened the yield curve. We don’t yet know if this (and other developments) will be enough to avoid a recession. The 10-year/3-month inversion has been a reliable recession forecaster in the past, and typically its warning signal precedes the onset of a recession by 12-24 months.
Issuers play it close to the vest
With this macroeconomic backdrop, credit card issuers have been, quite understandably, cautious. The American Bankers Association recently reported, “The total number of new accounts (opened in the previous 24 months) fell 2.5 percent compared to a year ago — the sixth consecutive annual decline — reflecting drops in new subprime and prime accounts, which fell to their lowest level in approximately four years.”
Translation: Unless you have amazing credit, card issuers are reluctant to give you a new account. They don’t know where the economy is headed, and they don’t want to overextend themselves with loans to people who might not be able to pay them back if they lose their jobs. They’re also wary of the sign-up bonus arms race — that is, paying steep incentives to attract customers who may not stick around for the long haul.
Consumer demand for credit has been weak, too. The New York Fed’s Quarterly Report on Household Debt and Credit tracks consumer credit inquiries over the preceding six months. That reading declined sharply from 2008-10. Ever since, it has remained in a narrow range roughly 40 percent below where it was at the beginning of 2008.
Signals of silver linings
The news isn’t all bad, however. Far from it. Credit card delinquencies remain quite low by historical standards. Consumer confidence is strong. And the ABA says the number of credit cardholders who are paying their bills in full is a record high. The strongest job market in 50 years is a huge contributor to these stats.
Still, keeping up with your bills in a robust economy is much easier than doing so in a recession. If the yield curve is correct and a downturn awaits in 2020 or 2021, it’s all the more reason to knock out your credit card debt ASAP. Sign up for a 0 percent balance transfer card, take on a side hustle, sell unneeded possessions and cut your expenses. Do whatever you need to do to avoid paying high credit card rates. Because while they’ve fallen slightly thanks to the recent Fed rate cuts, the national average (17.44 percent, as of Nov. 20) is still a hefty price to pay — far higher than your typical mortgage, auto or student loan.
Here are three other notable themes from this year:
The rise of alternative credit
Experian Boost is the most widely available form of alternative credit scoring. It’s giving credit — literally — for positive behaviors that didn’t used to count in credit scoring (such as paying your cellphone and utility bills on time). Experian says more than a million Americans signed up in the first six months of the program. Some 61 percent of them earned a higher score, and the average increase was 13 points. We’ll see more alternative credit scoring systems in 2020 and beyond. Lenders want to make the best possible underwriting decisions, and they’ll tap into a new wealth of data and analytics capabilities.
Point of sale lenders are hot, too
Affirm, Afterpay, Klarna, QuadPay and Square Installments are examples of this rapidly growing trend. They all work a little differently, but the common thread is that they’re positioning themselves as alternatives to credit cards. They allow consumers — including those who may not have credit cards or high credit scores — to buy now and pay later. Many consumers like the predictability of these plans; they know exactly how much they owe and how many months they have to pay it off. That makes them feel better than an open-ended credit card balance. That’s especially true for young adults who are new to credit and scared of debt thanks to their student loans and their memories of the Great Recession. Traditional credit card companies have gotten into the installment plan business as well (e.g., Pay It Plan It from American Express, My Chase Plan/My Chase Loan and Citi Flex Plan/Citi Flex Loan).
Apple Card takes a bite at the credit market
I can’t conclude a 2019 credit cards wrap-up without mentioning Apple Card, which was the year’s most notable card launch by a wide margin. It’s not the best option for rewards chasers and it was dogged by several controversies (such as allegations that the card issuer Goldman Sachs discriminated against women by giving them lower credit limits than their husbands). Still, Apple Card has sizable appeal.
Apple is a highly successful company with a very loyal following. It will be fascinating to see whether Apple Card leads to more Apple Pay adoption, and perhaps even a lucrative Apple-branded payments ecosystem with many users paying merchants and friends within the same closed loop that’s housed in their phones. Plus, Apple Card is available to a wider range of credit profiles than most rewards cards. Whereas the rewards appear ho-hum to a hobbyist, they look much more attractive to someone building or rebuilding their credit score.
Apple Card also broke new ground with a digital-first mantra that is more secure and appeals to tech-savvy consumers. While 2019 wasn’t the most exciting year for credit cards overall, Apple Card certainly livened things up, and it’s worth keeping a close eye on in 2020 and beyond.
Ted Rossman is the industry analyst and columnist at Bankrate.com and CreditCards.com. He has been interviewed by hundreds of media outlets, including the Wall Street Journal, Forbes, NBC Nightly News, CBS News, CNBC and Fox Business. Ted also writes the Wealth and Wants column for CreditCards.com, which focuses on cash back cards. He previously spent seven years as a member of the award-winning communications department at CreditCards.com and its sister sites, The Points Guy and Bankrate.com.
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