What are the main reasons for the surge in credit growth in 2021 despite the economic challenges of 2020? Why are new-to-credit users more likely to be delinquent on their payments?
The surge in credit growth in 2021 can be attributed to a few factors, including easier access to credit products, a need for financial flexibility, and an optimistic outlook on the future. Remote banking has also made it easier for people to sign up for new accounts online without having to visit a physical bank branch. Additionally, with interest rates hovering near zero during 2020, people have become more willing to use credit as they understand they will not be punished with heavy accruing interest payments. With this newfound willingness to borrow from lenders comes a heightened level of demand for access to new forms of funding that allows people greater financial flexibility and freedom. Furthermore, despite some negative economic indicators throughout 2020, Americans remain generally optimistic about their financial future, which has helped push the number of new-to-credit significantly higher than in previous years into 2021.
New-to-credit users are more likely to be delinquent on their payments due to a lack of experience and knowledge when it comes to managing finances and debt. They may not have enough financial literacy to understand how to properly use a credit card, or how to pay down the balance in full each month. Another reason why new-to-credit users are more likely to be delinquent is because of limited access to traditional forms of financing. Without access to other forms of loans or mortgages, these consumers may find themselves turning to their credit cards for emergency funds or unexpected expenses. Without having an understanding of credit scores and best practices for paying off their balances on time, this could quickly spiral out of control and lead them into delinquency. Economic uncertainty due to COVID-19 may have also played a role in new users taking on more debt than they can handle, especially if they were forced into unfamiliar situations with their finances. Additionally, new credit card users are more likely than those with established accounts to be taken advantage of by predatory lenders who charge higher interest rates and fees.
Establishing Credit: A Double-Edged Sword for New Credit Card Users
Having a credit card can be a great way to establish and build up your credit. However, for new credit card users, it can also be a double-edged sword. On one hand, it’s a chance to gain greater financial freedom and improve your credit score. On the other hand, new users are more likely to miss payments, which can negatively impact their credit scores. Missing payments means not paying what is owed when it’s due, which can lead to hefty late fees and interest charges. Therefore, while establishing credit is important, new users should also be cautious and responsible to avoid damaging their credit.
What is credit card delinquency?
Credit card delinquency is when a consumer fails to make the minimum required payment on their credit card bill by the due date. This can happen for a variety of reasons including excessive debt, unemployment, or simply forgetting to pay. Credit card delinquency can have serious ramifications for consumers due to the penalties that are typically associated with it. Late fees, interest rate hikes, and damaged credit scores are just some of the consequences of not paying your credit card bills on time. Credit card delinquency rates vary depending on a variety of factors such as age and credit history.
In general, those with no established credit (new-to-credit users) are more likely to be delinquent than those with established credit. The reasons behind this may include unfamiliarity and inexperience with managing multiple payments as well as having limited access to other forms of financing such as traditional loans or mortgages. Furthermore, new-to-credit users may also find it difficult to access emergency funding which could put them at greater risk of being delinquent. Additionally, new-to-credit users may be more likely to take on larger amounts of debt than those who have had credit cards for longer periods – increasing their chances of becoming delinquent due to their inability to pay off the balance in full each month. Furthermore, economic uncertainty during 2020 caused many individuals to sign up for new accounts online without ever visiting a physical bank branch which could lead them into taking risks they wouldn’t normally take and potentially becoming delinquent if they haven’t learned how best to manage their finances yet.
According to the Federal Reserve Bank’s April 2021 Senior Loan Officer Opinion Survey, 4.4 percent of total US credit card balances were 90 or more days past due (90+ DPD). The American Bankers Association reported that in 2020, 8 million accounts had delinquent payments between 30 and 89 days and another 6 million had payments that were 90 or more days past due. Experian’s State of Credit report for 2021 suggests that 18% of consumers have a delinquency on their credit records at any given time. According to TransUnion’s Q1 2021 Industry Insights Report, 11.7% of Americans have at least one delinquent account on file with their credit bureau which equates to roughly 28 million people nationwide.
Why are new credit card users more likely to be delinquent on their payments?
One of the main reasons why new credit card users are more likely to be delinquent on their payments is inexperience and knowledge when it comes to managing finances and debt. New-to-credit users may not be financially literate to understand how to properly use a credit card, or how to pay down the balance in full each month. This can lead to taking on larger amounts of debt than they can realistically afford, which could quickly become unmanageable. Another reason why new-to-credit users are more likely to be delinquent is because of limited access to traditional forms of financing. Without access to other forms of loans or mortgages, these consumers may find themselves turning to their credit cards for emergency funds or unexpected expenses. Without having an understanding of credit scores and best practices for paying off their balances on time, this could quickly spiral out of control and lead them into delinquency.
The economic uncertainty that occurred in 2020 due to COVID-19 meant that many people were forced into unfamiliar situations with their finances. New credit card users are also more likely than those with established accounts to be taken advantage of by predatory lenders who charge higher interest rates and fees to maximize profits from unaware customers. Lastly, even though there are measures put in place by banks such as late payment warnings and notifications, some people may still forget or overlook this information leading them towards delinquency on payments. In summary, new credit card user’s inexperience with managing multiple payments combined with limited access to other forms of financing as well as taking on larger amounts of debt than they can afford have all been proven factors that increase the likelihood of these individuals not making their payments on time which can have serious consequences for consumers due to the penalties associated with delinquency such as late fees, interest rate hikes, and damaged credit scores just some among many others.
Lack of experience with credit
Lack of experience with credit is a major contributing factor to delinquency rates for new credit card users. This is especially true for those who are new to credit and may lack the financial literacy or knowledge needed to effectively manage their finances and debt. To use a credit card effectively, individuals must understand the importance of making payments on time, paying down the balance in full each month, and avoiding taking on more debt than they can afford. Without proper education and guidance, new users may find themselves mismanaging their debt and becoming delinquent on their payments.
Predatory lenders often target those with limited access to traditional forms of financing, such as mortgages or car loans, which can lead unsuspecting individuals into high-interest rate loans or accounts with steep fees attached. While banks have measures in place such as late payment warnings and notifications, some people may still overlook this information, leading to delinquency on payments.
During times of economic uncertainty, it becomes even more important to figure out how best to use credit responsibly. This is because predatory lenders often capitalize on vulnerable consumers’ lack of knowledge about managing money and debt. Additionally, it is crucial to consider the impact that delinquency has on one’s credit score when managing a credit card account. A single instance of delinquency can cause significant damage to a person’s credit score, which could take months or years to recover from. As a result, any mistakes made early on could have long-term consequences for a person’s ability to access other forms of financing, such as mortgages or car loans, in the future.
Understanding how to use credit responsibly is essential for all individuals, whether they are new to credit or have established accounts already. Proper education can help consumers avoid taking higher risks with their finances, ultimately leading them away from becoming delinquent on their payments.
Lack of income or financial stability
Lack of income or financial stability can make it challenging for many new credit card users, particularly young adults starting in their careers or those with limited income. Low-income earners are more likely to accumulate higher levels of debt and delinquency due to their inability to pay off the balance in full each month. Inexperience with managing credit can also make it difficult for individuals to understand the consequences of missing payments or taking on too much debt, leading to a financial spiral that is hard to escape.
Predatory lenders often target those who do not have access to traditional forms of financing such as mortgages or car loans, offering high-interest rate accounts or loans with steep fees attached. This can be especially concerning during times of economic uncertainty when predatory lenders capitalize on unsuspecting consumers’ lack of knowledge when it comes to managing money and debt.
While banks have implemented measures such as late payment warnings and notifications, some individuals may still forget or overlook this information, leading them toward delinquency on payments. It’s important to understand how to use credit responsibly and educate oneself on key topics related to finance, such as making payments on time, paying down the balance in full each month, and avoiding taking on more debt than one can afford. Any negative impact on one’s credit score can have significant long-term consequences, potentially affecting one’s ability to access other forms of financing such as mortgages or car loans.
High-interest rates and fees
New credit card users often lack knowledge about how interest rates and fees work, which can lead to higher balances and difficulty making payments. These users may not be aware of the impact of fees on the total balance, which can quickly add up over time even if they make the minimum payment each month. This makes them vulnerable to predatory lenders who offer high-interest rate loans or accounts with steep fees attached, taking advantage of individuals who lack experience in managing their finances.
Credit card companies may also impose compound interest rates on missed or late payments, increasing a consumer’s debt over time and making it even more challenging to pay off their balance. This situation can be particularly challenging for individuals with a low income who have limited funds to make significant progress against their debt load, creating a vicious cycle of constantly increasing debt levels and rising balances. Additionally, carrying a revolving balance on a credit card account can be expensive, leading to bankruptcy in extreme cases.
To avoid these problems, consumers should educate themselves about how interest rates and fees work before taking out any loan or line of credit. It is important to make informed choices about money management and avoid taking on too much debt. By understanding the impact of fees and interest rates, consumers can make better financial decisions and use credit responsibly.
How can new credit card users avoid delinquency?
The best way is to only use a credit card for necessary purchases, such as groceries or gas, and to pay the full balance due at the end of each month. This will prevent the accumulation of debt and ensure that payments are made on time. However, new credit card users should also take several additional steps to ensure they do not become delinquent on their payments.
Tips for managing credit
Establishing a budget and tracking spending is essential for anyone looking to use credit responsibly. This helps to provide structure and manage finances in such a way that there is enough money left over each month for any additional expenses or unforeseen circumstances. Additionally, tracking spending helps to provide insight into where money is being spent and how much is going out each month.
Setting financial goals and objectives with realistic deadlines can help keep an individual focused on the long-term goal of becoming debt-free. Paying bills on time is another important factor when it comes to avoiding delinquency. Making payments early or setting up automatic payments can help avoid forgetting due dates and taking advantage of potential discounts or rewards.
Furthermore, it’s just as important to prioritize paying down the balance in full each month if possible as this will avoid costly interest rates from accruing on outstanding balances and potentially sending one spiraling towards delinquency. Educating oneself on key topics related to finance such as understanding how interest rates work and the importance of building an emergency fund can also go a long way toward avoiding debt issues in the future.
Resources for financial education
To help new credit card users learn more about managing their credit, numerous local and national organizations offer financial literacy programs, such as the National Endowment for Financial Education (NEFE). There are also a variety of online resources that provide educational tools on topics such as understanding interest rates and reading credit reports, such as Pyramid Credit Repair, MyFICO, Credit Karma, and NerdWallet. Credit counseling services are available through organizations such as The National Foundation for Credit Counseling (NFCC), which provides certified counselors who can assess an individual’s current debt situation and create a personalized action plan to help them pay off existing debts or prevent further accumulation of debt.
