Credit card charge-offs at small banks are approaching an 8-year high, according to a report from The Wall Street Journal. This is a measure of the credit card balances that banks write off as losses when consumers cannot make the payments after a certain period of time. Charge-offs increased to 7.2% in the fourth quarter of 2017, up from 4.5% a year prior.
By comparison, big banks have only seen a slight increase in charge-offs over the last few years. Their fourth quarter loss rate was 3.5%, much lower than the 10.6% peak in 2010.
Surging credit card losses among small banks could reflect poor money management practices among low- to mid-income households. These cardholders often apply for credit cards with local credit unions and small banks because they do not have the credit score or income to get a credit card from a major issuer. Small banks may have slightly loosened their application requirements in an attempt to maintain their stake in the credit card industry, but that may not be what is best for consumers.
The Danger of Widespread Credit Card Approval
When banks loosen their credit application requirements, they end up extending money to people who may not be able to afford it. This is the type of practice that led to the housing crisis of a decade age. A home buyer may get approved for a $200,000 home loan, even though his income realistically only supports a $130,000 home. For credit cards, a person with a monthly income of $2,000 may get approved for a $1,000 limit on a credit card that could take years to pay off.
Local banks and credit unions have closer, more personal relationships with their customers. That is one of the perks of working with a small financial institution. However, this also means that workers may be more likely to bend a rule in favor of their clients. This may put people in a potentially dangerous financial situation.
Managing Your Credit Card
If you have been approved for a credit card from your bank, think carefully about how you will use your line of credit. Do you need the full amount on the credit card, or just a small portion of it? Spend what you can pay back at the end of the month—nothing more. Set up a repayment plan before you use your credit card, and abide by that until you pay off your debt. This will build your credit and ensure you do not spend above your means.
If you do not think you can resist the temptation of a credit card, do not get it. Yes, you were approved, but you know your spending habits better than the bank. If the credit limit is too high, ask for a lower one. Test your abilities with a small credit line. If you successfully repay it several times over, you can consider applying for an increased credit limit.