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Why You Should Prepare for Another Credit Crisis

Credit card companies are taking steps to protect themselves against the next financial downturn.

The November Elliott Wave Financial Forecast showed this chart and noted:

BearMarketCreditCardRates

This chart shows that the spread between the average credit card rate and the three-month U.S. T-bill yield hit 15.08 in July, surpassing the peak level in the aftermath of the Great Recession. The Wall Street Journal explains that higher rates are "a way for lenders to protect themselves against future loan losses. Rising charge-offs weighed on profitability in 2016 and 2017." Credit cards, subprime debt and risky mortgages are feeling pinched because they are generally most susceptible to the liquidity constraints that accompany a credit squeeze. Their deterioration resembles or is more pronounced than in 2007, suggesting a credit crisis that will be at least as large.

Now, more than a month later, a Dec. 12 Bloomberg article notes:

Americans are projected to fall seriously behind on their credit card bills at the highest rate in a decade as banks push a record number of people to get plastic.

The share of credit card borrowers who are at least 90 days past due on their accounts will probably tick up to 2.01% next year, the highest level since 2010, according to a forecast by TransUnion. Still, the credit-rating company said the increase isn't a cause for concern, noting that bad card debt still remains much lower than the level seen during the last recession...

As lenders sign up more people for credit cards, the newest borrowers are increasingly falling behind on their bills. Accounts opened in recent years have been souring at faster clips than prior years, suggesting that more new borrowers are struggling to keep up with their minimum payments. For instance, 5.4% of credit cards originated in 2018 were delinquent within nine months, up from 4.5% the year before.

Major card issuers including American Express Co. and Discover Financial Services have warned they've begun to tighten their credit standards in anticipation of a potential economic downturn.

Elliott Wave International analysts anticipate a dramatic contraction in the supply of credit.

Get insights in the free report, "What You Need to Know Now About Protecting Yourself from Deflation."