Feb 6, 2024 - Economy

Credit card delinquencies spike, a sign of cracks in the strong consumer

Data: New York Federal Reserve; Note: Shows share of balances where payments are at least 30 days late; Chart: Axios Visuals
Data: New York Federal Reserve; Note: Shows share of balances where payments are at least 30 days late; Chart: Axios Visuals

Delinquency rates on credit cards and auto loans spiked to their highest since the Great Recession, according to a New York Fed report out Tuesday.

Why it matters: The striking resilience of the American consumer is a key reason why the economy has avoided a recession. Emerging stress on household balance sheets is one of the few worrying signs for a U.S. economy that has continued to shrug off threats.

  • The upswing in delinquency rates are an indication that the Federal Reserve's aggressive interest rate hikes are hitting consumers, who are struggling with the higher cost of borrowing.

What they're saying: "Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels," Wilbert van der Klaauw, an economic research adviser at the New York Fed, said in a press release.

  • "This signals increased financial stress, especially among younger and lower-income households."

By the numbers: An annualized 8.5% of credit card balances and 7.7% of auto loan balances moved into delinquency status in the final months of 2023, according to the New York Fed's quarterly report on household debt and credit.

Yes, but: Other types of debt — like student loans and mortgages — have delinquency rates below pre-pandemic levels.

  • Overall delinquency rates rose a tick to 3.1% in the fourth quarter — that's still 1.6 percentage points below the pre-pandemic level.
  • The New York Fed noted that missed federal student loan payments won't be reported until the end of this year — which keeps the reported rates of delinquency low.

Between the lines: The upswing in delinquency rates for credit cards and car loans is perplexing against a backdrop that would appear to allow for a healthy consumer — including a strong labor market and wages that are finally rising in real terms.

  • On a call with reporters, New York Fed researchers noted pockets of overextended consumers and churn in the labor market that has left some people unemployed, which might be contributing to higher delinquency rates.

Flashback: The rising share of late payments is a reversal from the height of the pandemic when student loan and mortgage forbearance, as well as stimulus payments, pushed delinquency rates to historic lows.

  • Delinquency rates have been edging higher since those policies have expired.
  • Credit conditions are significantly tighter now. Banks, for instance, reported even tighter lending standards in the fourth quarter, according to the Fed's Senior Loan Officer Opinion Survey, released Monday.
  • "Appetite to make consumer loans (credit card, auto & personal loans) remains very weak and suggests lending growth in this area, that is so important for consumer spending, will soon contract" in annual terms, ING economist James Knightley wrote.

The intrigue: In a blog post published Tuesday, researchers at the New York Fed note that consumers with auto loans opened in the past two years are falling further behind versus those with loans from earlier years.

  • They theorize that it may be "because buyers during these years faced higher car prices and may have been pressed to borrow more, and at higher interest rates."
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