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Revolving Credit Card Debt Down But Interest Rates Now at Record Levels

by Peter Renton on September 26, 2011

There was good news last week for the nation’s credit card holders. The total revolving consumer credit card debt continues to fall along with default rates.

According to Forbes.com default rates were down at four (Discover, American Express, Chase, Bank of America) of the top six credit card issuers. Only Citigroup and Capital One saw increases. Is this because people are spending less? Quite possibly.

One reason consumers are able to keep up with their payments is that balances have dropped sharply since the height of the recession. Lower balances translate to lower minimum payments.

The Federal Reserve says that total revolving credit balances has dropped from $958 billion at the peak in 2008 down to $793 billion in July of this year. Charge-off rates have declined as well from a high of 10.96% in the second quarter of 2010 to just 5.6% in the second quarter of this year.

At the same time, though, credit card rates continue to move up and are now at an all time high according to creditcards.com. The average annual percentage rate on new credit card offers was at 14.96% last week when taking the average of the 100 most popular credit cards. If you have bad credit then the average rate jumps exactly ten percentage points to 24.96%.

When these banks are borrowing money at the lowest interest rates (basically zero) in their history why are credit card rates at record levels? One possible answer is that these banks are expecting the economic environment to worsen in the future (hence there will be higher charge-offs) and they are preparing for this situation by hiking rates. Regardless of the reason it is bad news for people who carry a credit card balance.

Good News for P2P Lending

Lending Club and Prosper must be enjoying this increase in credit card interest rates. The first place most people go to for credit is their credit card. If they are looking to finance a large purchase and they need to obtain a new card to do that they will be looking at a higher rate than ever before. Some of these people will get frustrated and start looking online for alternatives.

As this article from Investors Business Daily on Friday points out, there is a distinct interest rate advantage in p2p loans:

For the most creditworthy borrowers, the main appeal of P2P loans are interest rates 300 to 700 basis points below credit card rates.

This is the beautiful part of p2p lending for me. Borrowers get a fixed rate loan that can really help them pay off their revolving credit card debt and investors can get consistent fixed rate returns that are far above what is available through most other asset classes. It is a win for the borrower, a win for the investor and a win for Lending Club and Prosper.

{ 14 comments… read them below or add one }

Dan B September 26, 2011 at 12:05 pm

I’m confused, because this article published a few days ago seems to imply the opposite of what you’re saying.
http://money.cnn.com/2011/09/21/pf/credit_card_debt/

Peter Renton September 26, 2011 at 2:25 pm

@Dan, I missed that article, thanks for sharing it. That is another interpretation of the Federal Reserve data – I was basing my post on the Forbes article and the Creditcards.com data. I confess I did not pore over the Fed data myself.

The CNN article agrees that we have far less credit card debt now than we did in 2008. And the fact that credit card companies are issuing more cards doesn’t change the record high interest rates now being charged, which is the main point I was trying to make.

Roy S September 26, 2011 at 2:48 pm

@Peter, I think you forgot to mention the Credit CARD Act of 2009, the Dodd-Frank Act + amendments as well as all the other financial regulations put in place after the “2008 financial crisis” as contributing factors to the high credit card interest rates. Unfortunately, even with the higher interest rates, I don’t see Americans deleveraging on a massive scale after the recession ends. But the higher credit card interest rates are, however, a boon to the p2p industry.

Peter Renton September 26, 2011 at 3:00 pm

@Roy, Yes those changes to the credit card laws have also likely been a contributing factor to the increase in credit card interest rates. I agree that de-leveraging is not going to happen any time soon. Particularly when you consider that article on CNN that Dan shared.

Dan B September 26, 2011 at 6:04 pm

It would seem to me that given the rapid increase of the last few months, that’s it’s only a matter of a short amount of time until the debt levels will be at an all time high. Besides didn’t someone do a study in late 2010 & discover (not surprisingly) that something like 86 or 90% of the reduction in credit card debt during 2008-2010 was due to charge offs? Maybe someone else can recall more of the specifics but I’m almost certain that charge offs were a large percentage. Moreover charge offs were also way higher than average for those years both in terms of percentage as well as actual dollar amount.

Walter September 26, 2011 at 7:44 pm

Just an anecdote, but I have been absolutely inundated with 0% offers for credit card balance transfers in the past 6 weeks – and I’m pretty sure my FICO is hovering around 700. Judging from the decreased quality of the loans I’m seeing on LC, it looks like I am not the only one receiving such offers. I’ve tightened up my criteria a bit partly because of this and partly because LC has raised the rates on ‘A’ loans enough to make them viable for investment. The market ride in the same time period probably fed into this as well. I really wonder if the reason people are using the credit cards this time around is more ‘needs’ based than ‘wants’ based, or if the people who were going to default have mostly done so already and the stronger borrowers will see the benefit as banks open up to the people they perceive to fit in this category. Note that some credit card categories have lower rates than previous, per Fox news article below:

“Still, despite those increases, a few credit card categories CreditCards.com tracks are still relatively low. Balance transfer, business and low-interest credit card APRs are each lower now than they have been in months. For example, the national average APR for balance transfer cards, at 12.73%, is at its lowest point in two years. The low interest card category is the lowest it’s been in 2011, at 10.73%.”

Read more: http://www.foxbusiness.com/personal-finance/2011/09/07/rate-survey-credit-card-rates-stay-at-record-highs/#ixzz1Z71LiFJq

As a side note, it might be interesting to compare loan funding by category (or %s) with market movements over a period of weeks and/or months. Has this been looked at already?

Dan B September 27, 2011 at 1:32 am

I don’t think this time round will be any different than previous times. I remember reading a number of articles after the 2008 debacle about how that crash/recession was going to be a “behavior changer” & that the average consumer was going to be deeply changed in his behavior. People even suggested that it was going to be a-decade long retrenchment by the consumer that was going to be similar to the psychological damage that was inflicted to those who lived through the depression. I don’t see that any of the above has happened. Your average person has an unbelievably short memory. Anecdotally among friends etc., I see people who used to save substantially, maybe saving a little bit more. But those who lived paycheck to paycheck still do the same thing.

As for borrowers & p2p etc……..Though I have no prove I’ve long believed that at the end of the day these loans become just another payment that the borrowers have to deal with. Sure, there may be some good intentions of debt consolidation etc etc. & maybe a good percentage of borrowers do initially go down that path……………but 3-5 years is a long time & I can almost guarantee that most of those credit cards that get tossed into a drawer will end up seeing the light of day again. I personally don’t care what the p2p money is used for, but I think it’s wishful thinking that debt is being eliminated with any finality because of a p2p loan. I mean come on, maybe if we were in Japan that would be the case, but here?

Charlie H September 27, 2011 at 10:26 am

“but I think it’s wishful thinking that debt is being eliminated with any finality because of a p2p ”

Just like people were doing home loan consolidations to “wipe away” credit card debit was wishfull thinking.
People and behaviors never change until they do.

I would hope that we would become a nation of investors and turn away from entitlement feeding trough…. but thats wishful thinking on my part.

Peter Renton September 27, 2011 at 10:44 am

@Dan, The only thing that I have read that points to changed consumer behavior is an increase in the savings rate. I can’t remember where I read this but I think it said it has been increasing steadily over the past few years. But I think there will be a good percentage of consumers that will not change. So, we may end up seeing that savings rate trickle back down close to zero.

@Walter, Thanks for the link to the article, it is good to know that not all types of cards are at record levels. What I wonder is how many people shop around for a credit card balance transfer offer before checking out p2p lending. That would be an interesting study. Is everyone arriving at Lending Club or Prosper because this is their preferred option? Judging by the number of zero inquiry folks (about half of all borrowers) it seems that many borrowers are choosing a p2p loan as their first option.

@Charlie, I think it would be fascinating to see how many of these “debt consolidators” end up paying off debt. I see a number of second or third loans on Prosper that are still for debt consolidation which makes me wonder: did they have a huge amount of debt or are they racking up more debt even as they “consolidate”?

Michael September 27, 2011 at 11:04 am

@Walter
You just gave me a great idea for a new chart. The loan grades as a percent of all loans made for a month as a gauge to determine the quality of loans coming on to the platforms.

@Peter, Roy, Dan, et al
Keeping up with the Jones’ isn’t going away. My only concern is that it gets so bad in America that P2P loan default rates sky-rocket. People think 75K is all you need to be happy (http://www.time.com/time/magazine/article/0,9171,2019628,00.html) fact is if you finance a house, car, and live modestly 75K isn’t really anything if you ever plan to retire ever.

Peter Renton September 27, 2011 at 12:24 pm

@Michael, That would be another interesting chart. I had heard about that article, but the $75K number is flawed because it doesn’t take into account debt. Someone who earns $75K a year and has a $100K mortgage, owns their car and is single is a lot wealthier than someone earning the same amount with a $400K mortgage, a $25K car loan and three kids.

Dan B September 27, 2011 at 1:32 pm

Besides, is that $75k in NYC, San Francisco or $75k in Taft, CA ? (formerly named Moron, CA)

Peter Renton September 27, 2011 at 3:51 pm

@Dan, I think the article was citing a national average, but if you earn $75K in NYC you are probably below the poverty line….

Michael October 7, 2011 at 7:22 am

@Walter

What information are you using to make the statement “Judging from the decreased quality of the loans I’m seeing on LC, it looks like I am not the only one receiving such offers”. My findings are not aligning with that statement. I have seen an increase and A and B grade loans over the last two months.

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