Americans — particularly Millennials and those with lower incomes — are becoming increasingly overextended financially: Credit card and auto loan delinquencies have not only surpassed pre-pandemic levels, they’re the highest they’ve been in more than a decade.
During the fourth quarter, US household debt hit a fresh high of $17.5 trillion, up 1.2% from the three months before, according to the Federal Reserve Bank of New York’s latest Quarterly Report on Household Debt and Credit released Tuesday.
Debt balances increased across the board, with credit card balances rising $50 billion to hit a new nominal high of $1.13 trillion (when adjusting for inflation, balances have yet to surpass the levels seen in 2008).
Higher balances can be attributed to population growth, an increase in online spending, the surging cost of new and used cars, as well as economy-powering consumer activity. And while rising debt levels during the fourth quarter shouldn’t come as a surprise — holiday spending typically brings heftier credit card balances — New York Fed researchers say they’re keeping a close eye on that extent to which Americans are falling behind.
Financial stress is growing at a time when debt has become very expensive. Americans already weighed down by nearly three years of high inflation now have to contend with painfully high interest rates.
“Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,” Wilbert van der Klaauw, economic research adviser at the New York Fed, said in a statement. “This signals increased financial stress, especially among younger and lower-income households.”
During the fourth quarter, an annualized 8.52% of credit card balances and 7.69% of auto loan balances became delinquent, marking the highest annualized rates since the second quarter of 2011 and the fourth quarter of 2010, New York Fed data shows.
Overall delinquency rates remain relatively tame, thanks mostly to mortgage and student loans performing well, New York Fed researchers said.
Mortgages, which make up the lion’s share of overall debt, have been helped by a higher-quality borrower class and the pandemic-era refinancing boom. Student loan delinquencies will not be reported to the credit bureaus until later this year as part of the Biden administration’s student debt relief efforts.
While student loan delinquency rates may be their lowest on record, New York Fed researchers believe the resumption of payments has contributed to increased financial stress, especially for adults between 30 and 39 years old.
As such, things might get much worse before they get better, Matt Schulz, chief credit analyst at LendingTree, told CNN in an interview.
“Even though we’ve hit peak inflation, it seems inflation hasn’t disappeared,” he said. “Interest rates are still high, delinquencies are rising, and a lot of people haven’t fully begun repaying their student loans — because they haven’t necessarily had to yet.”
“There’s a lot of reason to believe that the near future is going to be pretty tough when it comes to debt,” he added.
But just how much worse it gets could depend on what’s happening right now. At the start of the year, Americans typically rein in spending and focus on paying down the credit card debt they racked up during the holidays.
The first quarter numbers are reported on May 7.
“Historically, we see debt — credit card debt in particular — dip in the first quarter, and when it was basically flat in the first quarter of 2023, it was a really bad omen of what was in store for us,” he said. “It’s going to be really interesting to watch what the first quarter numbers for 2024 are and whether we see that dip again, or if we see more of a repeat of what we saw in 2023.”
Read the full article here