Inflation-squeezed Americans are defaulting on their credit cards and auto loans at levels not seen since the financial crisis – and the struggle to pay their bills is poised to get worse as interest rates rise and the moratorium on student loans expires.
Low- and middle-income earners have been especially hit hard by soaring prices on everything from rent, groceries, and new and used cars despite the Federal Reserve’s attempts to tamp down stubbornly-high inflation.
This year, credit card delinquencies have hit 3.8%, while 3.6% have defaulted on their car loans, according to credit agency Equifax.
Both figures are the highest in more than 10 years.
“The increase in delinquencies and defaults is symptomatic of the tough decisions that these households are having to make right now — whether to pay their credit card bills, their rent or buy groceries,” Mark Zandi, chief economist at Moody’s Analytics, told the Washington Post.
With any savings from pandemic-era government stimulus checks dried up, many stretched borrowers have turned to opening new lines of credit — even as the average interest rate hit a record 20.6%, according to Bankrate.com — to try to pay off their debts.
There are 70 million more credit card accounts open now than before the pandemic in 2019 and credit card debt surpassed $1 trillion for the first time ever, this year according to the New York Federal Reserve.
“We’ve sped way past normal,” Mike Brisson, a senior economist at Moody’s Analytics said in a webcast, who referred to the growing delinquencies as “very concerning,” according to the Washington Post report.
The interest rates on credit cards could soar even higher as the Fed mulls another rate hike at the end of the month to bring inflation down to its target rate of 2% — from its current 3.5%.
Vulnerable individuals already squeezed by high rents and grocery prices will also need to start making student loan payments next month after their debts were paused for more than three years.
The pain felt by consumers could be a positive sign for Fed policymakers as they seek to thread the needle to avoid a recession with their much-ballyhooed “soft landing,” according to financial experts.
“The Fed might look at this and say this is the whole purpose of raising rates, to make it more difficult” to make purchases, Torsten Slok, chief economist at Apollo Global Management, told the Washington Post.
However, with the holiday season approaching, industry experts are also concerned that consumers will rack up even more debt on top of their rising energy bills, particularly as the cold weather kicks in and the cost of heating homes ratchets up.
Retailers, including Macy’s, Kohl’s and Nordstrom have also called out rising delinquency rates among their customers who have private label store cards.
Macy’s acknowledged that its store card delinquency rates were rising “faster than planned,” the company’s chief operating officer Adrian Mitchell said on an earnings call in August.
Other retailers like Foot Locker have blamed disappointing financial results on “consumer softness.”
“People don’t like going into default or delinquency with credit cards — it makes a lot of people feel very nervous and unhappy,” Neil Saunders, managing director for retail at the analytics company GlobalData, told the Washington Post.
“It underlines how much some consumers are under pressure, and it’s one of the cracks that’s appearing in the consumer economy.”