Warning about alarming trend not seen since the financial crisis
Americans are defaulting on their credit cards at the highest level since in the wake of the 2008 financial crisis.
After building up cash reserves during the Covid-19 pandemic, high inflation has now all but depleted the savings of lower-income consumers.
Credit card lenders wrote off $46 billion in seriously delinquent loan balances in the first nine months of this year, according to BankRegData.
That is up 50 percent from the same period in 2023, and the highest level in 14 years, The Financial Times reported.
Write-offs are when a bank decides it is unlikely a borrower will make good on their debts, and are a clear sign of growing financial distress.
'High-income households are fine, but the bottom third of US consumers are tapped out,' Mark Zandi, head of Moody's Analytics, told the outlet. 'Their savings rate right now is zero.'
Household funds are becoming increasingly stretched after years of high inflation and heightened borrowing costs.
While the Federal Reserve began cutting benchmark borrowing costs from 21-year highs in September, the central bank signaled earlier this month the pace of cuts would be slower next year than expected.
Americans are defaulting on their credit cards at the highest level since the wake of the 2008 financial crisis
Banks are yet to report their numbers for the fourth quarter of this year, but there are early signs that more consumers are falling significantly behind on what they owe, according to the Financial Times.
Capital One, the third biggest lender in the US, said that as of November, its yearly credit card write-off rate had risen to 6.1 percent, up from 5.2 percent last year.
'Consumer spending power has been diminished,' Odysseas Papadimitriou, head of consumer credit research firm WalletHub, told the outlet.
After the Covid-19 pandemic, consumers were ready to spend after being forced to stay at home.
This meant credit card balances soared, and lenders accepted some customers who might not normally have qualified to take on debt as their bank accounts were flush with cash.
But increased spending, along with supply chain bottlenecks, led to a surge of inflation.
As a result, the Fed began aggressively hiking interest rates in 2022.
Higher interest rates then made it more difficult for people to pay off their credit card bills in full - especially the low-income Americans who may not have qualified in the past to take on loans.
In the 12 months to September, therefore, Americans paid $170 billion in interest on their credit cards, the outlet reported.
Credit card lenders wrote off $46 billion in seriously delinquent loan balances in the first nine months of this year, according to BankRegData
The Federal Reserve, led by Jerome Powell, signaled earlier this month it would slow the pace of cuts next year
According to analysis by WalletHub, the number of borrowers struggling to keep on track of their credit card bills has risen the fastest in Oregon
While many Americans had been hoping for some relief from high interest rates next year, the Fed muted its forecast for rate cuts next year at its latest meeting this month.
Officials now project they will make just two quarter-percentage-point rate reductions, rather than four, by the end of 2025.
The central bank said inflation 'remains somewhat elevated' above its 2 percent target.
Credit card delinquency rates, which are seen as a precursor to write-offs, are also high, which experts see as a warning sign.
A delinquency is when a borrower fails to make a minimum monthly payment 30 days or more past the due date on their credit card statement.
If a payment is missed by just one or two days, meanwhile, it is considered a late payment.
Americans hold $37 billion in credit card debt which is at least one month overdue, according to the Financial Times.
'Delinquencies are pointing to more pain ahead,' Papadimitriou told the outlet.
A separate report out in January showed that the number of people falling behind on their credit card bills increased in 49 of the 50 states last year.
According to the analysis by WalletHub, the number of borrowers struggling to keep on track of their credit card bills rose the fastest in Oregon. Between September 2022 and September 2023, delinquencies in the state soared by 51 percent.
