Consumers are having a tougher time making their credit card payments—and that may soon put pressure on banks and other lenders.
In the second quarter, the delinquency rate for credit cards stood at 2.8%, according to the St. Louis Federal Reserve. That level is just a tick higher than the 2.6% peak in the credit cycle ending in the fourth quarter of 2019. But it is well-below the 6.8% peak seen in the second quarter of 2009, when the economy was ensnared by the global financial crisis of 2007-09.
Although delinquencies have yet to reach concerning levels, the pace of them is causing some alarm.
Delinquencies hit an all-time low, at 1.6%, during the third quarter of 2021 when households were flush with pandemic stimulus cash. But they nearly doubled in just under two years as excess savings dried up while persistent inflation ate away at household nest eggs.
By comparison, delinquencies troughed at 2.1% in the first quarter of 2015, climbing 500 basis points by the end of 2019. A basis point is a hundredth of a percentage point.
“Credit card delinquency rates are back to where they were at the end of the last economic expansion, which in and of itself is not worrisome. The speed of that ascent is somewhat disturbing, however, in terms of what it says about the US economy,” wrote Nicholas Colas, co-founder of DataTrek Research.
There are some reasons to believe this cycle could be different. In the nearly two decades leading up to the financial crisis, delinquencies hovered between 4% and 5%. Since then, however, banks have tightened their underwriting standards and now face more stringent rules for how they build reserves for expected losses.
On the flip side, the Federal Reserve’s moves to lift interest rates have led credit card interest rates to increase by 43% over the last 18 months—marking the fastest clip on record, according to St. Louis Fed data dating back to 1994.
“Consumers who thought they could handle their credit card balances may now be behind the curve,” Colas wrote. There is some good news for banks in that higher rates can offset some of those losses, he added.
Wall Street will get a better assessment on how delinquencies are affecting banks next month when the sector starts reporting earnings.
Write to Carleton English at [email protected]
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