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Surge in Credit Card Delinquencies in 2023 Signals Rising Financial Stress, Says New York Fed

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Ticker Tea
February 07, 2024

đź“ť SUMMARY: In 2023, the New York Federal Reserve highlighted a concerning trend in consumer finance: a sharp increase in credit card delinquencies. Credit card debt, totaling $1.13 trillion, witnessed a substantial 59% rise in serious delinquencies (90 days or more past due), reaching 6.4% in the fourth quarter. This marks a significant jump from just over 4% at the end of 2022. The annualized quarterly increase was around 8.5%.

The surge in delinquencies wasn't limited to credit cards; mortgages, auto loans, and other loan categories also experienced increased delinquencies. However, there was a decline in delinquencies for student loans and home equity lines of credit. Overall, 1.42% of total debt was seriously delinquent, up from just over 1% at the end of the previous year.

Economic research advisor at the New York Fed, Wilbert van der Klaauw, noted that the rise in delinquencies, particularly for credit cards and auto loans, suggests heightened financial stress, especially affecting younger and lower-income demographics.

While delinquency levels are on the rise, the total debt growth rate is approximately in line with pre-pandemic trends. Household debt increased by $212 billion in the quarter, a 1.2% rise quarterly and 3.6% annually. Notably, credit card debt surged 14.5% from the same period in 2022, and auto debt climbed to $1.61 trillion.

This increase in borrowing costs is attributed partly to the Federal Reserve's rate hikes, totaling 5.25 percentage points from March 2022 to July 2023. Consequently, the average credit card rate jumped from about 14.5% to 21.5%. Despite these increases, credit card debt relative to income remains below pre-pandemic levels.

Joseph LaVorgna, chief economist at SMBC Nikko Securities, warns that the rising delinquency trend, occurring amid economic growth, warrants attention. He cautions that a mild economic downturn could escalate into a deeper crisis if delinquencies surge, potentially leading to a credit crunch.

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