Banks Begin Bracing for a Downturn
Even as Americans continue to spend at a strong pace, major credit card companies are preparing for the possibility that the good times may soon end. Rising delinquencies, inflation, and the ripple effects of President Trump’s aggressive trade policies are creating an uneasy financial outlook. Credit card issuers are already tightening lending standards, shifting focus toward wealthier customers, and setting aside billions of dollars to prepare for a wave of missed payments.
“The focus right now is on the future, which is obviously unusually uncertain,” said Jeremy Barnum, the chief financial officer at JPMorgan Chase, during a recent call with analysts. His words reflect a growing anxiety among lenders, who are trying to get ahead of a potential economic slowdown by increasing their cash reserves and changing who they target as customers.
A Surge in Spending Masks Warning Signs
On the surface, consumer behavior still looks strong. JPMorgan Chase reported that credit and debit card spending in the first quarter rose 7% compared to the same time last year. Bank of America said spending was up 4%. These numbers reflect Americans continuing to borrow, spend, and open new credit cards at rates higher than a year ago.
However, beneath the surface, signs of strain are emerging. Capital One recently reported that the number of cardholders making only the minimum required payment has risen above pre-pandemic levels. According to executives at American Express and Citigroup, travel and entertainment spending has slowed noticeably, while spending in basic categories like food and gas has picked up. That shift in spending habits suggests more people are cutting back on extras and focusing on necessities.
Citigroup’s CFO Mark Mason commented, “The consumer continues to be resilient and discerning in their spend. We’ve seen a shift towards essentials and away from travel and entertainment.” While people are still using their credit cards, they are doing so with more caution, which may point to growing financial pressure.
Delinquencies Reach a Five-Year High
The most concerning sign for credit card companies is the increase in delinquencies. According to data released in recent earnings reports, late payments have returned to levels not seen since before the pandemic. That trend is prompting lenders to take action now rather than wait for things to worsen.
JPMorgan Chase added nearly $1 billion to its loan loss reserves in the first quarter, bringing its total buffer for bad loans to $27.6 billion. The bank also reserved $3.3 billion specifically for loans it believes may not be paid back, up sharply from the $1.9 billion it had set aside for this purpose a year earlier. The company is also holding $1.5 trillion in cash and marketable securities in case of a major financial shock.
Citigroup followed a similar path, increasing its credit reserves by $1 billion in the first quarter and now holding a total of $22.8 billion. The bank’s total cost of credit also rose more than 15% from last year, reaching $2.7 billion.
Synchrony, a major issuer of retail credit cards, has taken a different approach by pulling back from riskier borrowers. The company reported a 3% drop in active accounts and a 4% decrease in purchase volume in the first quarter. CEO Brian Doubles told investors that while retailers had launched marketing campaigns to boost spending before price hikes, “the impact hasn’t shown up in the data.” Weekly sales remained relatively flat through early April.
Credit Becomes Harder to Get
As delinquencies rise, credit card companies are becoming more selective about who they do business with. U.S. Bancorp announced it is revamping its card offerings to focus more on premium products targeted at higher-income households. The bank is also shifting its marketing efforts toward wealthier consumers.
This strategic pivot is based on government data showing that the top 10% of earners now account for about half of all consumer spending in the U.S. Banks believe that focusing on more financially secure individuals will help protect their portfolios from defaults if the economy slows.
Meanwhile, those at the lower end of the income scale may find it harder to get approved for credit. Synchrony’s decision to step back from customers with lower credit scores is an example of how access to borrowing is shrinking for many households.
Wealthier Customers Are Holding Steady
While lenders focused on middle- and low-income customers are tightening their belts, companies that cater to affluent consumers are seeing more stable performance. American Express reported a 7% rise in U.S. consumer spending in the first quarter, and said that the positive trend continued into the first two weeks of April.
Steve Squeri, CEO of American Express, pointed out that low unemployment among white-collar workers has been a key reason for this stability. He told investors that strong job numbers “have probably been our John Wick,” referencing the action movie character known for surviving impossible situations.
Trump’s Tariffs Add More Uncertainty
Adding to the financial tension is the looming effect of President Trump’s new wave of tariffs. While these tariffs were introduced after the latest quarterly earnings, banks are worried they could slow economic growth in the months ahead. The International Monetary Fund recently lowered its economic growth forecasts for both the U.S. and the global economy, citing the potential impact of trade restrictions.
Though the effects of these tariffs have not yet appeared in bank earnings, they are likely to increase prices for both businesses and consumers. As costs rise, consumers may be forced to cut back even more, putting further stress on their ability to repay credit card debt.
What This Means for Consumers and the Economy
The moves banks are making now suggest they believe a downturn is not just possible but likely. For consumers, this means access to credit may become more limited and interest rates could remain high. Those already carrying large credit card balances may find it more difficult to manage their debt.
At the same time, consumer spending has been a key driver of the economy. If credit becomes harder to get and people cut back on spending, the ripple effect could slow economic growth. Retailers, travel companies, and service providers may all feel the pinch.
Bank of America CEO Brian Moynihan tried to offer some reassurance, saying, “Consumers are still solidly in the game.” But even as spending continues for now, the cautious tone of financial executives across the board shows that the industry is preparing for rougher waters.
