UPDATE: The results are in! At the end of each year, we at CardHub like to revisit the predictions that we put forth for the credit markets and grade our performance. You can check out the marks we received and the rationale for each grade below. If you disagree with our assessment, be sure to let us know about it in the comments section!
The holiday season tends to be a time for nostalgia and reflection. But as the calendar turns from 2013 to 2014, we will undoubtedly begin looking to the future, making resolutions and pondering the potential for new beginnings that always accompanies a New Year. But why wait to see what 2014 has in store? Foresight is important in finance, so let’s make some predictions for what awaits our wallets in 2014.
Armed with an ability to see into the future, most consumers, analysts and even politicians would all be interested in many of the same things. For example, will the federal government ultimately default on its debt and send consumer interest rates soaring? Will the economy continue its painstaking recovery from the Great Recession or tank once again? Can we expect lucrative rewards and 0% financing offers to stay on the table?
Though countless variables remain undefined, we can nevertheless make a number of educated guesses about the fate of the credit markets as the calendar turns to a New Year.
- Interest Rates Will Remain Low, But 0% Credit Card Offers Will Fall
Explanation: The general consensus among economists is that interest rates will remain near current levels through 2014, though they’re unlikely to reach quite the nadir witnessed in early 2013.
“Mortgage rates are likely to follow the usual quarterly seasonality patterns, but should be slightly higher on average than we saw in 2011 and 2012,” Dr. Albert A. Okunade, professor of economics at the University of Memphis, told CardHub in a recent interview. However, Dr. Jerome L. McElroy, professor of economics at St. Mary’s College, says that he does not believe “rates will rise much from present levels since it has become apparent that the housing recovery has slowed down partly because of higher mortgage rates.”
While low overall interest rates are good news for prospective home and car buyers as well as the fledgling economic recovery, the 2014 financing environment won’t be as favorable to consumers who use plastic to pay off big-ticket purchases over time.
CardHub’s quarterly Credit Card Landscape Reports indicate that 0% credit card offers – particularly those geared toward balance transfers – peaked midway through 2013, presumably due to the unsecured nature of credit card debt and the likelihood that the vast majority of qualified consumers have already availed themselves of such deals.
Grading Rationale: Interest rates have largely held steady in 2014, with the average rate for most segments of the market displaying slight increases relative to end of 2013 and the only true swing being seen in the fair credit segment, where the average rate has declined 7.26% based on Q3 2014 data. Our prediction that interest rates would remain low was therefore spot-on.
However, we also posited that 0% credit card offers would fall – an event which has not come to fruition. Not only are the best 0% credit cards – namely, the Citi Diamond Preferred, the Bank of Hawaii Visa Signature with MyBankoh Rewards and the Chase Slate– still available and continuing to offer extended interest-free intro periods, but there has been no significant decline in the average 0% deal either. The length of the average 0% purchase APR has declined by 1.96% since the end of 2013, while the length of the average 0% balance transfer APR has actually increased 4.34%.
So, in light of the fact that we got this one half-right, we had to give ourselves a C.
- We Will Rack Up $45 Billion in New Credit Card Debt
Explanation: Though the economic recovery and record-low charge-off rates have been able to mask our overleveraging woes of late, there’s no escaping the fact that consumers are beginning to repeat the same mistakes that got us into so much trouble during the Great Recession. After paying down more than $1 billion in amounts owed to credit card companies during 2009 and incurring a modest $2.2 billion in new debt during 2010, we’ve racked up an average of $41.2 billion in additional credit card debt in each of the following three years, according to CardHub Debt Studies.
“As consumers, we suffer from what I call short-term amnesia. After teetering on the financial brink it should be reasonable to think that we will have learned our collective lessons. But this was far from what happened,” says Dr. James A. Roberts, professor of marketing at Baylor University and author of Shiny Objects: Why We Spend Money We Don’t Have in Search of Happiness We Can’t Buy. “Sure, we tightened our belts and used our credit cards less and saved a little bit more (but still at anemic levels) but only until the economic storm clouds showed the slightest signs of abating. A little economic sunshine and savings rates dropped below pre-recession levels and credit card debt has climbed as recent statistics show.”
Unfortunately, CardHub’s data indicate no forthcoming slow-down in consumer debt, and we can therefore expect similar payment performance from credit card users in 2014.
Grading Rationale: Consumers racked up $38.8 billion in credit card debt during 2013, and we expected them to add even more to their tab –$45 billion – in 2014. It turns out our prediction may have been too conservative, as the latest data indicates that we will incur $54.79 billion in 2014. So, given that the sentiment of our prediction was correct while the exact figure we quoted was wrong, we gave ourselves a B for this one.
- Consumer Credit Scores Will Continue to Improve
Explanation: After peaking at 10.97% during the second quarter of 2010, the credit card charge-off rate has since fallen considerably. In fact, it declined more than 15% during 2013 alone, beginning at 3.78% and falling to 3.19% by year’s end. This indicates that credit card users have drastically improved their ability to stay current on monthly payments as the economy has improved, thereby alleviating the uncollectible debt burden on banks. We expect that charge-off rates will continue to fall in 2014 before ultimately reaching a bottom and that overall credit score improvement will follow.
While this provides consumers with widespread savings opportunities, higher credit scores also offer the potential for trouble. They enable us to garner substantial enough credit lines to hang our personal finances if we don’t adopt more sustainable spending and payment habits. That is extremely important for consumers to understand, considering just how far the repercussions of credit irresponsibility can extend.
“People expect credit data to matter when buying a house or car, but the surprises come when credit checks affect hiring, insurance, and renting,” says Dr. Elizabeth Dunne Schmitt, professor of economics at SUNY Oswego. “Furthermore, people do not always understand how specific decisions translate into a lower credit score in terms of magnitude. This is always a challenge as credit scores are based on mining millions of data points with complex, proprietary mathematical models.”
Grading Rationale: The economy improved during 2014, with the unemployment rate falling to 5.8% as of October, the stock market hitting a number of new record highs, and credit card charge-off rates remaining near record lows. A healthier economic environment results in more consumers being able to pay their bills and an increase in credit scores. As such, we gave ourselves an A in this category.
- Credit Availability Will Increase
Explanation: With credit scores continuing to rise and major metropolitan housing markets showing considerable improvement relative to years past, we expect credit to be increasingly accessible to consumers as the calendar flips to 2014. Banks are simply more willing to approve applicants for new lines of credit when the economy is on stable ground and consumers have more disposable income.
Interestingly enough, credit has grown increasingly accessible since the Credit CARD Act of 2009 took effect, despite opponents of the law initially predicting the exact opposite effect.
“At the time it was passed, many advocates of the banking industry argued that this law, by reducing the profitability of lending to so-called ‘subprime’ borrowers, would lead to greatly increased rates for these borrowers and a reduced availability of credit,” says David Min, assistant professor at the University of California, Irvine School of Law. “As a number of studies have shown, the CARD Act has not led to spikes in credit card rates for higher risk borrowers, nor has it led to reduced availability of credit. In fact, it looks like it has had its intended effect of reducing the hidden costs of credit cards for lower income consumers, with overall savings being estimated at about $20 billion a year.”
Grading Rationale: While it is admittedly difficult to gauge the availability of credit, the continued improvement of the economy and the aggressive offers that issuers have been marketing certainly give the impression that credit lines are available in abundance. The significant increase in credit card debt that we’re witnessing as well as recently relaxed underwriting standards for mortgages also lend support to the notion that credit is becoming more available to the general public. That is why we awarded ourselves an A in this category.
- Small Business Owners Still Won’t Be Worth Protecting
Explanation: Despite being held personally liable for debt and having corporate credit card usage reported to their personal credit files, small business owners are not covered by the CARD Act’s many protections. As a result, the more than 30% of small businesses that use credit cards for company funding do not benefit from the rule against arbitrary interest rate increases. Instead, they are hampered by fundamental debt instability that prevents growth and the new jobs that typically accompany it.
“Credit card debt instability is a huge problem for smaller businesses—particularly younger businesses, since they rely more heavily on credit cards,” says Molly Brogan Day, vice president of public affairs for the National Small Business Association. “If entrepreneurial people can’t garner the capital to launch a business, something that grows in the aftermath of a recession but hasn’t been as rampant in recent years as it had been after previous recessions, we’ll see fewer start-ups which means slower employment growth and less innovation.”
There is currently a bill in Congress that calls for an extension of the law to the small business community, but I, for one, am not going to hold my breath waiting for them to get anything done.
Grading Rationale: 2014 saw no major movement in terms of either Congress or credit card companies extending more of the most important aspects of the Credit CARD Act to the small business credit card segment. As a result, we gave ourselves an A in this category.
- Mobile Wallets & EMV Payment Processing Still Won’t Catch On
Explanation: In recent years, we’ve heard a lot about game-changing mobile wallet technology as well as the payment industry’s overall migration to the more secure EMV verification technology used in Europe, Canada, and various other parts of the world. We’re still waiting. And we will continue to do so in 2014.
For starters, mass adoption of mobile wallets has been delayed due to infrastructure overhaul requirements, market fragmentation, the reliance on smartphone rollouts, and security concerns.
“The security problems with mobile devices are just beginning to be understood, and yet we’re continually adding functionality,” says Barbara Endicott-Popovsky, director for the Center of Information Assurance and Cybersecurity at the University of Washington. “We didn’t solve the initial problems and we’re adding more possibilities for vulnerability. I think that’s an interesting recipe, and it’s not going to stop until we perfect our engineering.”
The road to EMV compliance is a long one as well, as Visa and other leading card networks are in the midst of a multi-year migration plan. Until it’s complete, or at least much farther along, the chip-based cards that are introduced are likely to be based on half-measure chip-and-signature technology, rather than the chip-and-PIN system used abroad.
Grading Rationale: One’s perception of this prediction depends on how you define “Catch On.” Both mobile wallets and EMV payment technology made major strides in 2014, with the release of Apple Pay and the continued introduction of chip-based cards to the U.S. market. However, relatively few consumers have the devices that support Apple Pay and relatively few merchants accept it. What’s more, the majority of the chip-based credit cards that have come to market in 2014 have been chip-and-signature cards, which aren’t as effective at combatting fraud aschip-and-PIN cards. Chip-enabled payment terminals are also still the exception rather than a norm in merchant locations. So while our prediction was pretty much on point, there is some room for people to quibble with its accuracy, and that is why we awarded ourselves a B.
- Expect Smooth Sailing on the Rewards Front
Explanation: While eye-catching 0% credit card offers have, for the most part, served their intended purpose, credit card companies are still able to attract creditworthy new customers with lucrative initial rewards bonuses and high ongoing rewards earning rates. That, along with the fierce competition we’re seeing among issuers for consumers with the highest credit scores, is why we expect generous rewards offers to continue to be available in 2014. Rewards are well-suited to both customer acquisition and retention, after all.
“In the customer acquisition approach, a company is generally offering an initial loyalty offering to encourage the customer to switch to them. For example, the credit card companies with airline-branded cards offer a large initial mileage bonus to encourage adoption of the card. This is based on research that would have identified the lifetime value of a customer to the airline for carrying the card,” says Randy L. Allen, senior lecturer and consultant in residence in the Samuel Curtis Johnson Graduate School of Management at Cornell University. “In customer retention loyalty programs, I am trying to capture more of the customer’s share of wallet for the company’s products or services. In this case the company will be evaluating the benefit to retaining the customer versus the cost of the offering.”
Grading Rationale: Credit card rewards largely retained their value in 2014, with the average initial bonus increasing for both cash back and points/miles credit cards relative to the end of 2013. Base earn rates for points and miles credit cards also remained unchanged, while standard cash back rates declined about 1% in value. That certainly seems like smooth sailing and is why we awarded ourselves an A in this category.
Overall Grades: With four A’s, two B’s and one C, CardHub’s 2014 Credit Predictions received an overall GPA of 3.43.