American consumers have happily charged yet another banner holiday season to their credit cards and now, some analysts warn, they could face a hangover in the new year.
A combination of higher interest rates, bigger home heating bills, and a slowing housing market could make it more difficult for people to pay down their balances or meet minimum payments on their credit cards, analysts said.
“After a great year in 2005, consumer credit is likely to deteriorate a bit in 2006,” said Scott Valentin, a consumer finance analyst with Friedman, Billings, Ramsey. “As a result, expect to see higher credit card defaults and higher delinquency rates.”
Over the past two years, the quality of consumer credit has steadily improved driven by a stronger economy, rising employment and a booming housing market that has encouraged a growing number of people to use home equity loans to pay down credit card debt.
As a result, payment rates – the measure of how fast credit card balances are paid off – are at record highs, and consumers continue to charge away.
Last week, Visa USA said that holiday shoppers charged $232 billion on its credit cards, an 18 percent increase over the same period a year ago, roughly Oct. 31 through Dec. 25.
Sounding a note of caution, some analysts warn that consumers will be in for a rougher ride in 2006.
“It’s as good as it can get,” said Neil Abromavage of Deutsche Bank. “Some of the excessiveness we’ve seen over the last few years has to filter through the system at some point.”
Of course, pundits have been predicting a slowdown in consumer spending ever since the economy went into a post-Sept. 11 tailspin.
Yet, save for an initial pullback, consumers have remained surprisingly resilient – so much so that spending in recent years has grown more rapidly than after-tax income.
“That by itself is reason enough to expect slower growth in consumer spending next year,” said John Lonski, chief economist for Moody’s.
But, Lonski continued, there is another metric that proves a far better predictor of the financial health of the American consumer: unemployment.
In October, for instance, consumer credit card delinquency rates fell to 3.3 percent, the 27th consecutive monthly decline. The drop mirrors a dip in the unemployment rate to 5 percent in October from 6.3 percent in June 2003.
Economists predict the unemployment rate will fall further, to 4.9 percent by the fourth quarter of 2006.
“If that forecast holds true, then we ought to avoid a deterioration of consumer credit that is severe enough to substantially slow consumer spending,” Lonski said.
Moreover, he added that the recent flattening of the yield curve could cause the Federal Reserve to halt its policy of interest rate hikes.
But even Lonski concedes that the housing market remains the big unknown.
On Thursday, the National Association of Realtors reported sales slowed even as prices continued to rise. Most analysts agree the trend can’t last as a backlog of unsold homes begins to push down prices.
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Payback time
Rising interest rates and higher heating costs may put the squeeze on Americans who rely heavily on their credit cards. So far, though, the big issuers have kept a tight leash on deadbeats.
Credit Card Delinquency Rates*
American Express: 2.39%
Capital One: 3.78%
Chase: 2.52%
Citibank: 3.19%
Discover: 4.23%
MBNA: 4.84%
*as of November 2005