Credit Card Delinquencies Surge to 13-Year High as Americans Struggle with Rising Costs

Overview

Credit card delinquencies jumped significantly in 2023, reaching the highest levels seen since 2010, according to data from the New York Federal Reserve. The delinquency rate – the percentage of credit card balances that are at least 90 days past due – rose to 3.52% in the fourth quarter. This indicates growing financial stress among American households.

Rising prices and interest rates are squeezing consumers and making it harder to keep up with payments. Many have relied heavily on credit cards amid inflation and now struggle with ballooning balances. At the same time, the Federal Reserve has hiked rates aggressively to fight inflation, driving up borrowing costs.

This confluence of factors spells trouble, especially for younger borrowers. Credit card and auto loan delinquency rates have surged fastest for those under age 30. With debt burdens high and incomes failing to keep pace, many find themselves falling behind.

Surging Credit Card Balances

Americans now owe over $1.13 trillion in credit card debt after balances jumped 12% last year – the largest annual increase in over 20 years. Much of this reflects consumers turning to credit to cover higher daily costs for essentials like food, housing, transportation and medical care.

With the cost of living rising faster than incomes and savings drying up, credit cards have bridged the gap. But this debt still needs to be repaid with interest. As the Fed hiked rates, borrowing costs climbed, putting further strain on households.

Average credit card rates now stand at a record-high 19%, translating to nearly $1,200 in interest per year for the average cardholder balance of around $6,500. This makes costs pile up quickly. Many consumers underestimate how hard it will be to pay the debt back later.

Financial Trouble Spreads Across Age Groups

Early signs of financial trouble have emerged among all ages, but strains are greatest for younger borrowers.

• For credit cards, delinquencies jumped most for those under 30, rising by nearly 60 basis points to 5.52%. This age group has average card balances over $7,700 – among the highest levels seen in decades.

• For auto loans, serious delinquencies (90+ days) among those under 30 shot up by nearly 150 basis points to 3.7%. With used car prices elevated, monthly payments have become less affordable.

Renters across age groups also face growing struggles in keeping up with housing payments. Over 10% of surveyed renters said they were unable to pay their rent in full for one or more months in 2023. Difficulty in covering essential needs suggests potentially severe knock-on effects on broader debt repayment.

Economic Growth at Risk with High Debt Levels

With overall household debt now exceeding $17 trillion, there are worries high leverage could exacerbate an economic downturn. Previous recessions saw spikes in delinquencies and defaults as incomes dropped and unemployment rose. Lenders then pull back on offering credit, dampening consumer demand.

There are some silver linings: mortgage balances and delinquencies remain low courtesy of fixed rates, and bank card delinquencies aren’t rising uniformly across all scores. However, sustained high inflation and interest rates may reveal more pervasive financial troubles as households exhaust savings and borrowing options.

Many expect elevated interest rates through 2024 as the Fed vows to remain aggressive against stubborn inflation. Unemployment may also rise as the economy slows. Both factors will pressure household budgets and likely lead to further jumps in delinquencies across the board.

Steps to Take for Financial Health

With card balances and rates high, now is a crucial time to pay off credit card debt and build emergency savings. This buffers against income disruption while rates are elevated. Those carrying balances should explore options like balance transfer cards or personal loans to ease the burden at lower cost.

Broadly, consumers should watch their budgets closely and tighten discretionary spending where possible as the economy enters a higher risk period. Paying down debt protects not only household finances, but also the broader economy’s stability.

Outlook Going Forward

Many expect conditions to remain challenging as high inflation persists and interest rates stay elevated through 2024. Consumers tapped credit cards to maintain previous spending levels, but now face reckoning as borrowing costs climb. Lower-income households in particular face cutoff from further credit access as lenders tighten standards.

With more vulnerability exposed, most see delinquencies moving even higher over the next year across a wider swath of consumers. This will pressure lenders’ profits while also constraining wider economic momentum. Both regulators and banks will likely take preemptive steps to curb riskier lending and encourage faster debt reduction.

Households will need to adapt spending patterns downward and refocus on deleveraging. In time this should contribute to lowering unmanageable debt exposure. But the road ahead looks rocky at first as consumers confront their financial limits in a rising rate environment. Maintaining fiscal prudence can help weather the turbulence.

Sources

https://www.newyorkfed.org/newsevents/news/research/2024/20240206
https://www.cnbc.com/2024/02/06/credit-card-balances-jump-to-new-1point13-trillion-record-at-end-of-2023.html
https://libertystreeteconomics.newyorkfed.org/2024/02/auto-loan-delinquency-revs-up-as-car-prices-stress-budgets/

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