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.