JPMorgan Earnings Reveal Consumers Ready to Borrow

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JPMorgan Chase (JPM) is the largest issuer of credit cards in the country, and its quarterly results can reveal a lot about the health and mindset of the American consumer.

Two metrics from JPMorgan's most recent report, released Tuesday, tell us a lot. Total spending on credit cards is up 7 percent compared to last year. And the percentage of people paying on time continues to increase. Only 1.3 percent of borrowers are 30 days or more delinquent. That means we are spending more, and we continue to make our payments on time.

We Still Like To Spend

Consumption is the motor of the American economy. And the fuel for American consumption is the credit card. Despite talk of becoming increasingly rational after the 2008 financial crisis, Americans are once again swiping their credit cards. Last year, Chase cardholders spent $118 billion on their credit cards. This year, they spent $126 billion. Spending continues to increase, as consumers feel more confident.

The Chase data reinforces data released earlier in the year by the Federal Reserve Bank of New York, which showed credit card balances growing again. Total credit card balances increased by $20 billion, the fastest rate of growth since the crisis.

We Are Paying on Time, and More Than the Minimum Due

Unemployment continues to decrease, and consumers are making payments on time. After the financial crisis, credit card defaults soared. However, in the current environment, people are able to make at least their minimum payment on time. Credit cards typically have very low minimum payments. You can usually pay only 1 to 2 percent of the credit card balance and remain current. After the financial crisis, even that payment became too much for many American families. But today, American consumers look financially healthier and are able to pay.

Even better, the data at Chase seems to indicate that people are able to pay far more than the minimum due. Although total spend increased by $7.7 billion, the total balances only increased by $800 million. We need to watch this indicator closely. When more of the spend is added to the balance, that means more people aren't able to pay their statement balance in full.

Early Warning Signs

An increase in spending, particularly now that people are fully employed, may not be a bad sign. Because companies like Chase create credit card products with robust rewards, a lot of good spending can happen on a credit card. Good spending means that the statement balance is paid in full at the end of the month, and people use the credit card to earn rewards and benefit from fraud protection.

However, bad spending can also happen on a credit card. If you are unable to pay your balance in full, you will end up paying high interest bills. Funding living expenses with debt can be a warning sign that a debt bubble is building.

Data from the last three months doesn't show a debt bubble. But it does show that we are spending again. The next 12 months will be important. If spending growth outpaces wage growth, we will inevitably start eating into our savings or start borrowing on credit cards. And 7 percent spending growth can't continue forever without wage growth, which has been absent from the economy.

Long Term Threat To Credit Cards

During this credit cycle, we may need to look at other products to determine whether or not a credit bubble is inflating. Younger Americans have fewer credit cards. And Silicon Valley is funding companies that are making it incredibly cheap to borrow. Companies like SoFi offer personal loans with variable rates as low as 4.04 percent. As JPMorgan CEO Jamie Dimon warned, "Silicon Valley is coming."

Although Chase's lending business was able to generate a 23 percent return on equity, that could come under increased threat from marketplace lenders like SoFi. If consumers continue to use their credit cards for rewards, but shift their borrowing to marketplace lending, returns would reduce dramatically. Interest revenue accounts for more than 50 percent of credit card earnings. And most of the interchange income is used to fund rich rewards. Credit cards are profitable because people borrow. As marketplace lenders continue to attack the lending market, the most profitable part of the credit card business comes under attack. At the moment, that attack is barely noticeable in the incredible profitability at Chase. But all of that could change quickly.

Nick Clements is the co-founder of, a price comparison business that helps people find the cheapest loans and the best savings accounts.
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