Higher pay and higher employment stability are major factors in the continued growth of the credit card market, a recent study by the American Bankers Association (ABA) indicates.
The study, published in ABA’s April 2017 edition of the Credit Card Market Monitor, shows that wages have steadily risen, driven by the increasingly stable labor market, leading to year-over-year growth in monthly purchase volumes.
The gains outlined in the report, which reflects credit card data from the fourth quarter of 2016, occurred across subprime, prime and super-prime risk tiers, including the following:
- “Monthly purchase volumes rose for prime and super-prime accountholders by 8.5 percent and 9.7 percent relative to year-ago levels;
- “The effective finance charge yield (a measure of interest payments relative to overall card usage) rose to 11.5 percent, but remains well below recession-era levels (e.g., 13.3 percent in Q1 2010). The increase is consistent with rising federal interest rates and an uptick in revolvers; and
- “As a share of disposable income, credit card credit outstanding increased 17 basis points to a 4.5 year high, but remains well below prerecession-levels and is broadly in line with readings since 2011. It continues to suggest that consumers are able to meet credit card obligations.”
The report also notes that account volumes continued to rise and the number of new credit card accounts (defined as those opened in the previous 24 months) increased to 88.1 million, driven in part by a 16 percent rise in new subprime accounts.
Fourth quarter increases also occurred among average credit lines across risk tiers. Among new accounts, super-prime cardholders saw the largest increase from the third quarter to the fourth (up 2.7 percent to $10,202). Prime and subprime credit lines increased to $5,571 (up 2 percent) and $2,536 (up 1.1 percent) respectively.
“The unemployment rate has been below 5 percent for nearly a year, and wages continue to rise slowly,” ABA Card Policy Council Executive Director Jess Sharp said in a statement. “As a result, more Americans are in a better position to establish and build credit. Card issuers are working to serve these individuals, often easing them back into the market at lower credit lines that can rise over time with a good payment history.”
The report also indicates that the share of accountholders carrying a balance at the end of each month, referred to in the report as “revolvers,” increase 0.4 percentage points to 43.7 percent of all accounts in the fourth quarter. The share of accountholders who pay their monthly balance in full each month, also known as “transactors,” dropped 0.1 percentage points to 29.1 percent of all accounts. Slightly more than 27 percent of accounts were dormant.
The average effective finance charge yield, a metric which measures interest payments relative to total outstanding credit in the market, showed an increase of eight basis points to 11.47 percent in the fourth quarter. The report attributes the increase to a rise in the number of revolvers. The metric has remained mostly flat in the five years prior and still sits below its high of 13.3 percent in early 2010.
“This report continues a pattern that we’ve seen over the last few years,” Sharp said. “Millions of Americans who faced challenges during and after the recession are back on their feet, while younger Americans who struggled to enter the workforce during the recession’s aftermath have been helped by improved labor conditions. As a result, both groups are well positioned to benefit from a credit card account and build credit.”