Home Markets Credit card delinquencies rose in 2023, indicating ‘financial stress,’ says New York Fed

Credit card delinquencies rose in 2023, indicating ‘financial stress,’ says New York Fed

by SuperiorInvest

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Credit card delinquencies rose more than 50% in 2023 as total consumer debt rose to $17.5 trillion, the New York Federal Reserve reported Tuesday.

Debt that has become “severely delinquent,” or delinquent for 90 days or more, increased in multiple categories over the year, but none more so than credit cards.

With a total of $1.13 trillion in debt, credit card debt that went into serious delinquency rose to 6.4% in the fourth quarter, an increase of 59% from just over 4% at the end of 2022 , reported the New York Federal Reserve. The quarterly increase at an annualized rate was about 8.5%, researchers at the New York Federal Reserve said.

Delinquencies also increased in mortgages, auto loans and the “other” category. Student loan delinquencies decreased as did home equity lines of credit. Overall, 1.42% of debt was 90 days or more past due, up from just over 1% at the end of 2022.

“Credit card and auto loan transitions into delinquency continue to rise above pre-pandemic levels,” said Wilbert van der Klaauw, economic research adviser at the New York Federal Reserve. “This indicates increased financial stress, especially among younger and lower-income households.”

While delinquency levels are rising, researchers at the New York Federal Reserve said total debt is rising roughly in line with the pace before the Covid-19 pandemic began in March 2020.

Household debt increased by $212 billion in the quarter, an increase of 1.2% quarter-on-quarter and about 3.6% from a year earlier. Credit card debt, however, increased 14.5% compared to the same period in 2022. Auto debt rose to $1.61 trillion, an increase of $12 billion quarterly and $55 billion annually, or 3.5%.

Borrowers have been hit by higher interest rates. In a tightening cycle that stretched from March 2022 to July 2023, the Federal Reserve increased its short-term borrowing rate by 5.25 percentage points, taking the federal funds rate to its highest level in about 23 years. The reference rate is incorporated into most adjustable rate consumer debt products.

Since the central bank began tightening, the typical credit card rate has jumped from about 14.5% to 21.5%, according to Federal Reserve data. Credit card debt as a percentage of income is still below pre-pandemic levels.

While the rise in delinquencies is occurring from low levels, the trend “needs to be watched because it occurs while the economy is still growing,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities.

“What happens if the economy slows and unemployment rises rapidly? Delinquencies could increase, which in turn would lead to a self-reinforcing credit crisis,” LaVorgna said in a note. “In other words, a mild recession could turn into a deep one.”

Fed researchers said rising rates likely influenced default rates. For cars, for example, they said payments have changed little even as prices have fallen, due to the high fee structure.

Student loan debt, an area of ​​focus for Washington lawmakers, has increased little during the pandemic period and currently stands at just over $1.6 trillion. That was a small change from the third quarter and was only up 0.4% from a year ago. President Joe Biden has forgiven about $136.6 billion in student loan debt since he took office. The proportion of seriously delinquent debt fell to 0.8%.

Mortgage debt increased by 2.8% in 2023, while the delinquency rate increased to 0.82%, a quarter of a percentage point higher than the previous year.

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