In this day and age, the sad fact of inflation is common knowledge. If you work within a financial institution you can see the effects of it as U.S. household net worth declines or how revolving debt is on the rise once more, this time with an annualized rate of 11.6%. Even basic necessities like fresh goods at grocery stores can be severely affected by the steady increase of inflation which is nowhere near its end. But how can these current issues affect credit card delinquencies?

In short, people will pay more with cash that is worth less due to the inflation rate.

A future problem resulting from this is that credit card delinquencies will increase which will pressure lenders and consumers. Lenders will need to restrict their practices when consumers need access to lines of credit to survive.

This potential risk is proven by the rising number of credit card delinquencies. Though there is good news in these numbers; consumers greatly repaid their obligatory debts when the CARES Act flushed accounts with consumer relief, tax benefits, and employment protection. The lowest point for credit card delinquency since 1980 was in the third quarter of 2021 with a rate of 1.56%. Since then, there have been three consecutive increases in delinquency bringing the latest numbers to 1.81%.

Some specific niches in financial institutions are more sensitive than others. While recessions unravel, those with poorer credit and smaller household budgets will be affected more quickly than those above the average household income level of $70,784.

Focusing on the more vulnerable issues is the best thing for credit policy managers to do. Initially, previously discussed erosion with the Apple card and Goldman Sachs’ aggressive lending to subprime FICO scores (>600) must be considered. Afterwards, the private label credit card (PLCC) market should be taken into account. The Mercator Advisory Group thoroughly examined the PLCC market in this report.

Two front-running PLCC companies, Synchrony and Bread Financial (formerly Alliance Data) have been affected by the ever-rising inflation. Seeking Alpha shows that Bread Financial:

• Showed that its credit card delinquency and net charge-off rates for August 2022 rose moderately from a month ago and drastically from the year-ago period.

• Its net charge-off rate lept to 5.3% from 4.5% in the prior month and from just 4.0% in August of 2021.

• Finally, its delinquency rate rose to 5.3% from 4.8% in July all the way from 3.6% a year before.

Mercator also delved into Synchrony, Bread’s main competitor:

• Synchrony Financials’ (NYSE: SYF) credit card delinquency and net charge-off rates both increased this past August as loan growth grew with inflation according to a recent SEC filing.

• The delinquency rate for this past August rose to 3.1% from 2.9% in July from 2.3% a year before. This trend shows that credit quality has been normalizing from historically low levels since the Covid-19 pandemic.

• The regulated net charge-off rate was 3.1% in August, rising only .1% from a month earlier all the way from 2.4% last year.

Credit policy managers are currently building their 2023 delinquency and charge-off budgets. Although, things are starting to bubble again. The top one hundred banks are at a favorable 1.84%. Smaller banks are not in such good standing. Many of them are at a poor rate of 5.98%. In planning 2023 MBOs, adding an extra one hundred basis points is a smart option for top banks. Relatively for smaller banks, unless there is some immediate correction, we can expect the numbers to approach the dismal record levels that the United States experienced in the Great Recession.