Credit Card Net Charge-Offs Are Rising. Here’s Why Banks Aren’t Too Concerned.

The Federal Reserve recently ended its most aggressive interest rate-hiking campaign in four decades. Many expected rising interest rates to thrust the U.S. economy into recession quickly, but consumers showed a robustness that surprised many.

Over the past few years, consumers have spent much of their excess savings and borrowed more. Last year, consumer credit card debt ended 2024 at $1.13 trillion amid record-high credit card interest rates.

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Not only that, but consumer credit began showing cracks. From the start of 2022 through the end of last year, the charge-off rate on credit card loans at commercial banks went from 1.72% to 4.24%, surpassing pre-pandemic levels.

In the first quarter, banks saw net charge-offs on consumer credit card loans rise once again. However, many big banks aren’t sweating it. Here’s why.

Consumer credit card net charge-offs have risen over the past several quarters

JPMorgan Chase (JPM 0.64%), Bank of America (BAC 0.44%), Capital One (COF 0.47%), and Discover Financial Services (DFS -0.52%) are some of the country’s largest credit card consumer lenders and have witnessed firsthand how consumers are doing.

Since interest rates began rising, so have consumer credit card net charge-offs (NCOs) and delinquency rates. NCOs are the amount of debt that is unlikely to be collected by the bank, and that is written off. Delinquency rates refer to the percentage of past-due loans and could be a leading indicator of where charge-offs go. These metrics can be a vital indicator of the health of the bank’s customer base.

Net charge-offs and delinquencies on consumer credit card loans have risen in lockstep across banks for several quarters. Banks with more resilient customer bases, such as JPMorgan Chase and Bank of America, have seen credit metrics deteriorate at a lower rate. Nonetheless, the overall uptrend is consistent with those with broader customer bases like Capital One and Discover.

Chart by author.

Here’s why banks are encouraged by what they see

Banks didn’t show much concern about the rising net charge-offs because of a slowing trend in delinquencies. Capital One saw 30-plus day delinquencies in the fourth quarter fall 0.32% to 3.67%. CEO Richard Fairbank noted that seasonal factors including tax refunds helped the decline, but the bank is still encouraged by what it is seeing.

Fairbank said that consumers have been a source of strength in the economy over the past few years thanks to resilient labor markets and that “rising incomes have kept consumer debt servicing burdens relatively low by historical standards.”

JPMorgan Chase echoed the sentiment during its earnings call last month, with CFO Jeremy Barnum saying, “Consumers remain financially healthy, supported by a resilient labor market.”

Chart by author.

Discover noted stabilizing delinquencies and sees credit performing in line with its expectations. Bank of America CFO Alastair Borthwick was also encouraged by the slowing pace of delinquencies and said that BofA’s net charge-offs would likely level out over the next quarter or two.

Improving credit metrics could lead to a coveted “soft landing”

Investors expect the Federal Reserve to cut interest rates sometime this year as long as they progress in bringing down inflation. According to the CME FedWatch Tool, the market expects the federal funds rate to be about 0.75% lower by next year.

The Fed hopes to bring down inflation without a recession and achieve a “soft landing,” and Capital One CEO Richard Fairbank said that “we definitely have seen what we think is sort of a landing.”

Consumers have demonstrated resilience over the past couple of years. Big banks view them as a continuing source of economic strength — which could bode well for bank lending alongside the growth of the U.S. economy.