Credit unions can’t handle the mounting debt load they’re dealing with and, according to a report released Thursday, are seeing some of their businesses fall prey to insolvency.
The report by Credit Card Industry Data, an industry group, said that more than 40 percent of credit unions are now facing insolvencies that could result in losses of $30 billion to $50 billion.
Some of the problems that have led to the downturn include a shrinking cash-flow, a shrinking payroll, a growing need for insurance and a lack of effective risk management.
“As more Americans are choosing to buy credit cards, they are turning to banks to lend to them,” said John Clements, the group’s chief economist.
“These are people who are struggling to repay their loans, so the banks are finding ways to increase their risk and their profits while they wait to see whether their customers are prepared to pay.”
The report, based on data from the Consumer Finance Research Institute, also said that credit card lending declined 3 percent to $12.4 billion in the fourth quarter.
While many of these problems are tied to the economic downturn, the report said that the biggest driver of the downturn is the fact that many people are unable to refinance their loans because of a lack.
“Many borrowers are struggling with rising debt loads and they don’t have enough cash on hand to make a down payment,” said Steven Kamin, an analyst at the research firm Citi.
“There’s a mismatch between the demand for credit and the supply of credit.”
In the fourth-quarter, only about one-third of the credit unions surveyed said they were able to refocus their operations on making a downpayment on their credit cards.
Many have also closed branches.
In New York City, credit unions that have more than $500 million in assets have seen a drop in customers in the past few years, said Gary S. Tuchman, CEO of the Credit Card Research Institute.
“Credit unions are struggling,” Tuchmans said.
“They’re not being able to keep pace with their customers.”
The credit unions cited three main reasons for the sharp drop in customer interest in credit cards: low interest rates and a drop-off in the number of people who were able pay their bills.
The problem is especially acute in the South, where credit unions have faced challenges for years.
In the third quarter, the average monthly payment on credit cards dropped 8.3 percent from the third to the fourth quarters of 2015.
“As interest rates have been at historically low levels, there is a decrease in the amount of debt people are able to pay, and that’s leading to more defaults,” Tufman said.
As many as half of the people in South Carolina who are eligible for a credit card offer have defaulted on their debt in the last year.
Many credit unions said they are still seeing people who have had trouble paying their bills in the four quarters ended March 31, but said they’re trying to help them pay their debts.
“Our staffs are continuing to assist those individuals who have paid their bills and are now making payments on their cards,” said Scott K. Anderson, the head of credit card for the South Carolina Association of Credit Unions.
“We are offering a credit union-wide credit counseling service to help address their financial challenges.”
Still, it’s not clear how much of a role the increased availability of credit cards played in the downturn.
Credit card issuers have struggled to get enough new credit card holders into their networks, which has helped boost credit card issuer revenue and the number and variety of card offers.
The number of cards issued by credit unions fell by 8 percent to 2.7 million, or 13.5 percent of the nation’s credit card market, the Citi report said.
In 2016, about 9.4 million people used credit cards to pay for their own expenses, and nearly half of those consumers had no credit history, the study found.