Though the financial crisis was almost half a decade ago, many customers remain stuck in their ways regarding finances, cutting back on spending and avoiding overextending themselves in terms of credit. Others are cutting back on taking out loans and reducing credit card balances.
Data demonstrates this new reality, as credit card default rates have fallen in the past few years, despite an unsteady unemployment rate. But, as the economy begins to recover and both banks and Americans are more comfortable with making purchases on credit, the number of credit cards, and, consequently, the default rate, is expected to rise.
According to American Banker, credit card data from the Federal Reserve showed that the overall delinquency rate in November was the lowest since 1991, when the data was first recorded. As author Kevin Ward explained, "The bigger picture is that risk, having largely been wrung out of the card industry during the financial crisis, has yet to make a serious return."
In addition to consumers attitudes, a 2009 law – as well as overall hesitance in the industry – also kept banks from increasing their level of risk, giving customers fewer financial options.
How this trend may change
November also saw an increase in credit card balances, possibly from holiday shopping, which would continue into December. And as banks begin to increase their lending, the delinquency rate may begin to creep back up. Analysts have been expecting a decrease in credit quality for some years, and though it has not been seen, this trend may make an appearance in this upcoming year, Ward said.
For any financial institution increasing levels of credit, credit risk management software can help avoid the possible growth of delinquencies by detecting qualified borrowers. With software, banks can avoid the industry's rising default rate and stay solvent and profitable.