Banks are bracing for fallout as extra individuals wrestle to make bank card funds on account of misplaced paychecks amid the coronavirus pandemic, according to a report by The Wall Street Journal (WSJ).
Credit card companies — Capital One, Discover, Synchrony — have been allowing people to pause payments for 30 days or more. Some are also reducing or forgiving late fees and eliminating interest charges. Others are forgiving part of card balances.
Credit card bills are usually the first debt people stop paying when times are tough, and analysts are anticipating defaults and charge-offs to accelerate. Further, banks can do little about nonpayment since the credit is unsecured.
Discover and Synchrony shares have dropped by more than 50 percent.
By allowing people to defer payments, banks are hoping the economy will rebound, and with it, their customers. But many people were already overextended before the coronavirus hit, relying on debt “at record levels” to stay on top of escalating expenses for health insurance, housing and college, WSJ reported.
Some card issuers — Discover, Capital One, American Express, JPMorgan Chase — planned in advance for possible losses and put aside billions of dollars in preparation. Others are limiting the amount of credit being extended to both new and current customers.
“We clearly have already had significant deterioration,” Discover CEO Roger Hochschild told WSJ. “This was very quick and cataclysmic.”
Another issue for credit card companies is the simple fact that people aren’t spending as much as they remain under lockdown orders.
“For the next two years or so until everything settles, [credit cards] will be much less profitable and more risky,” said Brian Riley, director of credit advisory services at Mercator Advisory Group.
Customer spending limits are also being cut by top credit card companies in response to the crashing economy due to the pandemic. Overall, however, consumers are in a better position than when the Great Recession hit in 2008, and they have comparatively less debt.