Surge in Household Debt and Delinquencies Indicate Rising Financial Distress, Warns Federal Reserve

Record Household Debt

While most eyes are on the upcoming CPI print and April retail sales reports, another significant report has just been published by the New York Fed. The Household Debt and Credit Report for Q1 2024 provides detailed data on credit card debt and delinquencies, painting a worrying picture of the US consumer's financial health. Despite a slowdown in credit card growth, total consumer debt hit a record high in March, while the personal savings rate dropped to an all-time low.

Increasing Delinquencies

The report reveals that US household debt rose to a staggering $17.69 trillion in the first quarter of 2024, an increase of $184 billion or 1.1% from the last quarter. Since the onset of the pandemic, consumers have accumulated $3.4 trillion in debt, which carries significantly higher interest rates. With credit card rates and total credit at all-time highs, American families are feeling the financial pinch, particularly with the persistent rise in the cost of essential items like food and rent.

Worsening Financial Distress

The report also shows that an increasing number of borrowers are falling behind on their credit card payments. Credit card balances have risen nearly 25% from the first quarter of 2020. Analysts predict that with inflation and interest rates expected to remain high, credit card balances could reach new highs later in 2024.

Increasing Delinquency Rates

As of March, 3.2% of outstanding debt was in some stage of delinquency. Although this is still 1.5% points lower than the fourth quarter of 2019, delinquency transition rates increased for all types of products, according to the Fed. Economists at the St. Louis Fed noted that credit card delinquency rates are returning to historically more normal levels after pandemic-related government assistance programs pushed them to unusually low numbers. However, they also pointed out that current levels of credit card delinquency are higher than pre-pandemic levels, suggesting an accelerating trend that began before the pandemic.

Bankruptcy and Collections

About 121,000 consumers had a bankruptcy notation added to their credit reports last quarter, and approximately 4.8% of consumers held some debt in third-party collections. Interestingly, those consumers currently in collection have the highest number on record in collection amounts. This suggests that once creditors start collecting in earnings, the amount of debt in third-party collections will be off the charts.

High Credit Utilization

The report also revealed that borrowers using more than 60% of their credit are falling into delinquency at a faster pace than before the pandemic. About a third of balances associated with borrowers using more than 90% of their credit became delinquent in the past year, compared to about 25% before the pandemic.

Student Loan Repayment

Despite the end of the student loan repayment moratorium, it appears that not only is nobody repaying their student loans, but that debt issuers aren't even bothering to make the delinquent debt as such. It's difficult to determine how much of that debt is delinquent as missed federal student loan payments will not be reported to credit bureaus until the fourth quarter.

Younger Borrowers and Lower Incomes

The Fed researchers found that younger borrowers and those with lower incomes are more likely to be financially stressed than older borrowers and those with higher incomes. Millennials were the only group whose delinquencies exceeded their pre-pandemic rate. The Fed’s report showed 6.9% of credit card debt transitioned to serious delinquency last quarter, up from 4.6% a year ago. And for credit card holders aged 18–29, 9.9% of balances were in serious delinquency.

Auto Loan Delinquencies

Auto loan delinquencies are also higher as the average monthly car payment jumped to $738 in 2023. Close to 2.8% of auto loans are now 90 or more days delinquent — that equates to more than 3 million cars. Auto loans are the second-largest debt category following mortgage debt, with $1.62 trillion outstanding.

Housing Debt

The largest household debt holding is for housing, accounting for more than 70% of the total. That debt is performing well, but homeowners are increasingly tapping their accumulated home equity in the form of home equity loans, while new mortgage originations have tumbled near record low levels due to soaring rates.

Home Equity Loans

On the other side of the table, some $16 billion in additional home equity loans was originated — the biggest increase since 2008 — and $37 billion was added over the past year. Homeowners have about $580 billion in outstanding home equity credit available, the most in about 15 years.

Conclusion

The surge in credit card debt and delinquencies is a cause for concern, especially when even the Fed is warning that the US consumer is in increasingly weak shape. While some economists argue that the surge in credit card debt is partly a normalization after consumers used their fiscal stimulus windfalls to pay down their balances in 2020-21, others point out that delinquencies might understate the issues consumers are facing due to credit card debt. What are your thoughts on this matter? Do you think the surge in household debt and delinquencies is a cause for concern? Share this article with your friends and discuss. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.