Bad debt in America is on the rise as more and more debtors default on credit payments as “charge off’s” hit a four year high, with experts within the banking, stock market and the economy looking to see what is causing this turn around and the last six year trend.
In the second quarter of 2017 charge-offs rose to 3.29%, the highest levels in four years, and the fifth consecutive year that bad debt increased, leading to what can only be described as an alarming trend.
The rise in bad debt in previous years was mostly found in the sub-prime sector, this is now creeping into supposed good debt.
Although it is not quite panic stations just yet as the levels of bad debt have not reached anyway near the 10% levels witnessed back in 2010 during the financial crisis, and nor do lenders believe it will, the levels we are currently experiencing at what the lenders are calling a return to normal levels after a period of “abnormally low numbers” of charge-offs.
Though some lenders are a still a little nervous about the current situation and what this could mean for future underwritings.
“The overall environment is deteriorating,” said David Nelms, chief executive at Discover, in an interview. It is “not quite as favorable as it was over the past few years.”
The rise we have seen since 2010 has been attributed to relaxed view on what constitutes as a prime borrower, as we have seen criteria become more lax, as banks chase bigger profits, through increased credit lending.
One big point that has many worried is the fact that we are seeing these sorts of figures irrespective of the fact that U.S unemployment is at all time lows, which raises concerns what will happen if the employment situation changes anytime soon.
“That’s a little concerning,” said Michael Taiano, a director at Fitch.
Credit cards had also taken on a new importance in the Fed’s annual stress test of banks in June. According to the Fed, banks could face $100 billion in projected credit card losses in a severely adverse hypothetical recession, tied with commercial and industrial loans.
“We’ve seen an inflection point in credit,” said Charles Peabody, managing director at Compass Point Research & Trading LLC. “It is going to get worse from here.”
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