Americans burdened by credit card debt and high prices

While the U.S. economy is generally healthy, there are groups of Americans who have depleted their savings and increased their balances. Credit cards after battling against inflation for more than two years.

Experts worry that members of these groups — mostly low- and middle-income Americans, who tend to be renters — are falling behind on their debt payments and could face further deterioration in their financial health in the year. , particularly those who recently resumed paying their student loans.

“The U.S. economy is currently performing better than most forecasters expected a year ago, thanks in large part to a resilient consumer,” wrote Shernette McLoud, an economist at TD Economics, in a report released Wednesday. “However, this expense is increasingly financed with credit cards.”

Americans had more than $1.05 trillion on their credit cards in the third quarter of 2023, a record and a figure sure to grow once the Federal Deposit Insurance Corporation (FDIC) acronym in English) releases fourth-quarter data next month.

A recent report from the credit rating company Moody’s showed that non-performing loan rates and credit card charge-off rates—loans that a bank believes will never be repaid—are now well above their 2019 levels and are expected to continue rising.

The Federal Reserve defines the delinquency rate as loans that are more than 30 days late, whether or not they accrue interest, and the charge-off rate as loans removed from the books and charged against loss reserves, and which are annualized, net of recoveries.

These worrying metrics match the average bank credit card interest rate of about 21.5%, the highest since the Federal Reserve began tracking the data in 1994.

“In general, the consumer enjoys good credit health. However, the reality is that there are beginning to be some significant signs of stress,” said Silvio Tavares, president and CEO of VantageScore, one of the country’s two main credit rating systems.

Most analyzes of Americans’ financial health tend to tell the story of two consumers. On the one hand, the roughly two-thirds of Americans who own their homes and those who have invested in the stock market and done substantially well.

In general, they have the savings cushion necessary to face high inflation. Delinquency rates on single-family homes remain near historic lows and home prices have continued to rise.

But for the rest of Americans, things look tough.

“There are these notable groups of consumers, mostly low- and middle-income renters, who have not benefited from the wealth effect of higher housing and stock prices, and who are feeling financial stress that is driving these levels higher.” of late payment. “Inflation has hit them very hard,” said Warren Kornfeld, a senior vice president at Moody’s, in an interview.

Kornfeld, who last week co-wrote a report analyzing rising delinquency levels, believes they will continue to rise this year.

Consumers’ financial health could play a major role in the 2024 election. President Joe Biden promotes his efforts to reduce costs for American families. Republicans respond that Biden is to blame for the higher costs to begin with.

One way to measure this bifurcation of the American economy is to look at the results of some of the major credit card companies.

Historically, Capital One, Discover Financial and Synchrony customers have been those with lower credit scores, while American Express typically serves the richest and most affluent.

At Synchrony Bank, the largest issuer of co-branded retail credit cards, the cancellation rate jumped from 3.5% to 5.6% in a year. Meanwhile, about 4.7% of Synchrony customers are 30 days or more late on their bills, which is also higher from a year ago.

Discover customers have balances of $102 billion in their Credit cards, 13% more than the previous year. Meanwhile, cancellation and 30-day delinquency rates have increased. Executives say they notice the impact of inflation.

“Think of a consumer who earns US$50,000 a year,” said John Green, Discover’s chief financial officer, at an investor conference in December. “When inflation exceeds wage growth, they make decisions in terms of how much they are going to spend, what bill they are going to pay, and what, frankly, they are going to leave as an option.”

Inflation peaked at 9.1% in June 2022 and is now slightly above 3%. But the costs of many goods and services are still high.

A loaf of bread that cost $1.54 in December 2020 cost $2.02 at the end of last year, and a gallon of gasoline has risen from an average of $2.17 to $3.29 in the same period, according to the Bureau of Labor Statistics.

Renters, in particular, have felt the impact. The median rent for a property with up to two bedrooms has increased from $1,424 at the end of 2020 to $1,713 at the end of last year, according to the realtor.com website.

VantageScore’s Tavares is concerned that the recent resumption of student loan payments could more severely impact these clients’ ability to pay their debts.

“People are struggling to pay these obligations that they haven’t had to pay in three years, and this is affecting exactly the demographic we’re talking about here: younger people, less wealthy people.”Tavares said.

American Express has also seen its cancellation and delinquency rates increase over the past year, but not as much as its competitors.

AmEx has historically served customers with higher credit scores who pay off their cards at the end of each month. But even now there are more AmEx customers who have unpaid balances. AmEx’s net churn rate last quarter was 2%, higher than 1.2% a year earlier.

In the middle of the spectrum are JPMorgan Chase and Bank of America, two giant banks with huge customer portfolios. Their credit metrics have increased only modestly, probably because both banks’ customers span the entire range of income levels and credit scores. But the two banks have been setting aside more money to cover potential credit losses, mainly because of their credit card portfolios.

Americans are unlikely to see any relief—from banks or interest rates in the short term—that would allow them to refinance their high-interest debts.

The Federal Reserve signaled Wednesday that its first interest rate cut is probably months away. Additionally, credit card interest rates tend to be extremely high compared to what the Federal Reserve charges for loans.

Furthermore, banking industry sentiment reports show that banks are being more conservative in lending, meaning these Americans will be less likely to be able to refinance their high credit card bills with lower-interest loans. .

At this point, economists don’t consider it likely that the financial stress these low-income Americans feel will spread widely to the broader economy, at least not yet.

But economists and other experts see this rise in delinquencies as one of the growing risks to the economy this year, especially if student loans become too much for younger, more indebted Americans.

“The increase in delinquencies, although it requires monitoring, does not sound the alarm,” TD Economics’ McLeod wrote in his report.