Credit card default rates by U.S. consumers are on the rise, according to a report published this week.
The S&P Dow Jones Indices and Experian on Tuesday released data through April 2018 that showed that consumer bank card defaults rose 8 points to 3.86%. Meanwhile, the auto loan default rate fell 6 points and mortgage default rate declined by 4 points to 0.68%.
Credit card debt has hovered around $1 trillion for the past several months, an indicator that Americans are borrowing heavily to pay for consumer goods rather than autos and mortgages. But banks, which have played along for the most part, are starting to pull the rug out from under some customers’ financial feet.
What rising credit card defaults mean for you
New data from the S&P/Experian Consumer Credit Default Indices indicate that bank card default rates, which have risen or held steady since November 2017, are now at their highest level since June 2012.
“The banks got piggy, handed out credit cards like candy and now we’re all going to suffer indigestion,” Money expert Clark Howard says.
Clark says credit card-holders need to be concerned about two things that are likely already happening: A decrease in credit limits and, with that, declining credit scores.
“We saw the first hint of this two months ago when I started getting calls from people who were Capital One customers,” he says. “Out of the blue, Capital One was cutting their credit limits. Nothing consumers had done or anything like that, Capital One just decided that for whatever reason, their profile represented too much risk and they started cutting people’s limits.”
If your credit limit is lowered, your credit score will generally go down. “That’s because what’s known as your utilization rate — how much of your available credit you’re using — goes up, and that alone accounts for almost a third of what makes up your credit score,” Clark says.
“Be extra-mindful of utilization right now because of the worry that the banks suddenly have about defaults,” Clark says.”With default rates rising so much, you need to make sure you don’t become a target of a credit card company saying you’re dangerous.” To be on the safe side, Clark recommends keeping your credit utilization rate below 30%.
To calculate your credit utilization rate, add up all of your credit card balances and divide that number by your total credit card limits. “The resulting percentage is a component used by most of the credit-scoring models because it’s often correlated with lending risk,” CreditKarma.com says on its website.
What you should do to soften the credit limit blow
Clark says that to limit your exposure to these two changes stemming from mass defaults, he recommends you get an additional credit card now.
“If you only have a single credit card, it is ultra-important that you get a second card from another issuer,” he says. “This doesn’t mean that if you have a Visa you get a Mastercard. What it means is that you get it from a different bank or credit union than whoever issues the credit card you already have.”
The reason for this is because if you have multiple cards, it lessens the impact to your credit score when a bank chooses to clamp your credit limit. “I think about people who have three or four cards from Chase alone, and that may be the only cards you have, but if Chase decides one day that they don’t like you, it’s a really bad day for you.”