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Defaults on U.S. credit card loans have reached their highest level since the 2008 financial crisis, a sign that the financial health of low-income consumers is waning after years of high inflation.
Credit card lenders wrote off $46 billion in seriously delinquent loan balances in the first nine months of 2024, a 50 percent increase from the same period a year earlier and the highest level in 14 years, according to industry data compiled by BankRegData. Write-offs, which occur when lenders decide that a borrower is unlikely to repay their debts, are a closely watched measure of distress in large loans.
“High-income households are doing well, but the bottom third of U.S. consumers are being exploited,” said Mark Zandi, head of analysts Moody's. “Their savings rate is now zero.”
The sharp rise in defaults is a sign of how consumers' personal finances are becoming increasingly strained after years of default. High inflationSince the Fed has left borrowing costs at high levels.
Banks have not yet announced their numbers for the fourth quarter, but early signs suggest that significantly more consumers are falling behind on their payments. Capital One, the third-largest credit card bank in the United States, after JPMorgan Chase and Citigroup, recently said that as of November, its annual credit card write-off rate, which is the percentage of its total loans that are classified as non-recoverable, was 6.1 per cent. The hundred. percent, compared to 5.2 percent a year ago.
“Consumers’ purchasing power has diminished,” said Odyssias Papadimitriou, president of consumer credit research firm WalletHub.
American consumers have emerged from pandemic-era lockdowns flush with cash and ready to spend. Credit card lenders were happy to help, enrolling customers who might not have qualified in the past based on income, but who seemed like safe debtors because their bank accounts were full of cash.
Credit card balances have soared, rising by a combined $270 billion in 2022 and 2023, pushing the total owed by U.S. consumers on credit cards above $1 trillion for the first time in mid-2023.
This spending combined with supply chain bottlenecks caused by the coronavirus has led to an explosion in inflation, which is prompting the Fed to increase borrowing costs starting in 2022.
High balances and interest rates have led Americans who can't pay their credit card bills in full to pay $170 billion in interest in the past 12 months ending in September.
This has absorbed part of the excess cash that was in the bank accounts of consumers, especially low-income consumers, and as a result, more of these borrowers are struggling to pay off their credit card debt.
Hopes that the US central bank would cut interest rates quickly in 2025 after this year's cuts were dashed last week, when officials only expected… Half a percentage point of cuts in interest rates next year, compared to expectations of one percentage point three months ago.
In a sign of how consumers are struggling, even after writing off nearly $60 billion in consumer credit card debt last year, there is still another $37 billion on consumer cards that are at least one month past due.
Credit card delinquency rates, seen as a precursor to debt write-offs, peaked in July, according to data from Moody's, but fell only slightly and remained about a percentage point higher than they were on average in the year before the pandemic. .
“Payment delinquencies indicate more pain to come,” WalletHub's Papadimitriou said.
He added that Donald Trump's threat to impose broad tariffs, which could raise inflation and interest rates, would be “two things that are very problematic for the consumer in 2025.”
