The U.S. credit card delinquencies have witnessed a dramatic surge, escalating over 50% in 2023, as reported by the New York Federal Reserve. This uptick in delinquencies is part of a broader trend that saw total consumer debt swell to an unprecedented $17.5 trillion, with credit card debt alone reaching a record $1.13 trillion by the end of December. This marks a significant 4.6% increase from the preceding quarter and the highest level recorded in Federal Reserve data dating back two decades.
The surge in delinquencies is not confined to credit cards alone but spans across various debt categories, including mortgages and auto loans. However, credit card debt moving into serious delinquency, defined as 90 days or more past due, saw the most pronounced increase, reaching 6.4% in the fourth quarter-a 59% rise from just over 4% at the end of 2022. This trend is particularly alarming among younger and lower-income households, signaling a potential weakening in household financial stability.
Wilbert van der Klaauw, an economic research advisor at the New York Fed, highlighted the gravity of the situation, noting, "Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels. This signals increased financial stress, especially among younger and lower-income households."
The Federal Reserve's aggressive interest rate-hike campaign, which saw the fed funds rate reach its highest level in approximately 23 years, has exacerbated the situation. The tightening cycle, aimed at curbing inflation, has led to a significant increase in the cost of borrowing, with the average credit card annual percentage rate (APR) soaring to a record 20.72%. This increase in borrowing costs comes at a time when many Americans are already grappling with inflationary pressures, forcing them to rely more heavily on credit to cover everyday expenses.
The rise in credit card usage and delinquencies is a concerning development, as it suggests that more consumers are overextending themselves financially, potentially due to the resumption of student loan payments or financial overreach during the pandemic's stimulus period. This situation is compounded by the high-interest rates on credit card debt, which can significantly increase the long-term cost of carrying debt.
As total household debt continues to climb, with significant increases in auto loan balances and mortgage balances, the financial pressures on U.S. households are intensifying. The inflation spike, although showing signs of cooling in recent months, continues to impose severe financial burdens on most households, with low-income Americans feeling the disproportionate impact of price fluctuations on their already-stretched paychecks.
The alarming rise in credit card delinquencies and the record-high levels of consumer debt underscore the challenges facing the U.S. economy and the need for vigilance among policymakers and financial institutions to address the underlying issues contributing to this trend.
