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Defaults on US credit card loans have reached their highest level since the 2008 financial crisis, a sign that the financial health of low-income consumers is deteriorating after years of high inflation.
Credit card lenders wrote off $46 billion in bad loans in the first nine months of 2024, up 50 percent from the same period a year earlier and the highest level in 14 years, according to industry data compiled by BankRegData. Foreclosures, which occur when lenders decide that it is unlikely that a borrower will be able to service their debts, are a closely watched measure of serious credit distress.
“High-income households are good, but the bottom third of US buyers are sold,” said Mark Zandi, head of Moody's Analytics. “Their savings rate is now zero.”
The sharp rise in defaults is a sign of how consumer finances have grown over the years high inflationand as the Federal Reserve has left borrowing costs at high levels.
Banks have yet to report their figures for the fourth quarter but early signs are that many customers are falling behind on their debts. Capital One, the third-largest U.S. credit card issuer, behind JPMorgan Chase and Citigroup, recently said that as of November its annual credit card charge-off rate, which is the percentage of all loans marked as delinquent, hit 6.1 percent, up from 5.2 percent a year ago. the past.
“Consumers' spending power has been reduced,” said Odysseas Papadimitriou, head of consumer credit research firm WalletHub.
US consumers have come out of lockdown during the pandemic flush with cash and ready to spend. Credit card lenders were happy to help, signing up customers who may not have previously been successful based on income, but looked like safe borrowers because their bank accounts were full.
Credit card balances rose, rising by a combined $270 billion in 2022 and 2023, and pushing the total number of US consumers with credit card debt above $1tn for the first time by mid-2023.
That spending and bottlenecks caused by the coronavirus led to inflation, prompting the Fed to raise borrowing costs starting in 2022.
High balances and interest rates left Americans unable to pay their credit card debts in full paying $170bn in interest in the past 12 months ending in September.
That absorbed some of the excess cash in the bank accounts of consumers, especially those with low incomes, and as a result, many borrowers are struggling to pay off their credit card debt.
I hope that the central bank of the US will quickly lower interest rates in 2025 after this year's cut was reduced last week, when officials were only speculating. half a percentage point rate cut next year, compared with a forecast of 1 percent three months ago.
In a sign of how struggling consumers are, even after writing off nearly $60 billion in credit card debt last year, another $37 billion remains on consumer cards past one month.
Credit card delinquency rates, seen as a precursor to write-downs, rose sharply in July, according to data from Moody's, but fell only slightly and remained about a percentage point higher than the average a year before the pandemic.
“The giants point to more pain to come,” said WalletHub's Papadimitriou.
Donald Trump's threat of broader tariffs, which could increase inflation and interest rates, will be “the two most problematic things for the consumer in 2025”, he added.