NEW YORK (AP) — The U.S. economy is generally healthy, but after more than two years of battling inflation, some Americans have exhausted their savings and depleted their credit card balances.
Experts believe that members of these groups (primarily low- and moderate-income Americans who tend to live in rental housing) are delinquent on their debts, and that those who took out debt recently are likely to become even more delinquent in the year ahead. We are concerned that our financial situation may worsen.repayment resumed student loan.
“The U.S. economy is currently doing better than most forecasters expected a year ago, largely due to consumer resilience,” Sharnette McLeod, an economist at TD Economics, said in a note published Wednesday. Thanks to that,” he said. “However, recently, more and more people are using credit cards to cover their expenses.”
In the third quarter of 2023, Americans held more than $1.5 trillion in credit cards, a record number, and this number is expected to increase in the third quarter of 2023. It’s certain. 4th quarter data The announcement will be made by the Federal Deposit Insurance Corporation next month. Credit card delinquency and charge-off rates, the percentage of loans that banks believe will never be repaid, are now well above 2019 levels and will continue to rise, according to a recent report from credit rating agency Moody’s. It is expected that
These alarming indicators are in line with the average bank credit card interest rate of about 21.5%, the highest since the Federal Reserve began tracking the data in 1994.
“Overall, consumer credit is healthy. But the reality is that we are starting to see significant signs of stress,” said VantageScore, one of the country’s two major credit scoring systems. said Silvio Tavares, President and CEO.
Most analyzes of Americans’ financial health tend to tell the story of two consumers. On the one hand, about two-thirds of Americans own their own homes, and some people invest in the stock market and do quite well. They generally had the savings cushion needed to weather high inflation. Delinquency rates for single-family homes are near historic lows. Housing prices continue to rise.
but, rest of americathings seem to be rough.
“Many consumers who have not benefited from the wealth effects of rising house prices and stock prices are conspicuously low- and middle-income renters, who are experiencing financial stress that is driving up delinquency levels. They’ve been hit very hard by inflation,” Moody’s senior vice president Warren Kornfeld said in an interview.
Kornfeld, who co-authored a report last week examining the rise in delinquency rates, expects delinquency rates to continue rising this year.
The financial health of consumers could play a big role in the 2024 election. President Joe Biden is part of an effort to lower costs for American families. Republicans counter that Biden is responsible for the high costs in the first place.
One way to measure this dichotomy in the American economy is to look at the performance of some of the largest credit card companies. While Capital One, Discover Financial, and Synchrony’s customers have traditionally had lower credit scores, American Express typically has customers who are the wealthiest and most affluent.
At Synchrony Bank, the largest issuer of retail co-branded credit cards, amortization rates rose from 3.5% to 5.6% in one year. Meanwhile, about 4.7% of Synchrony’s customers are more than 30 days past due on their bills, which is also an increase from a year ago.
Discover customers have $102 billion in credit card balances, an increase of 13% year over year. Meanwhile, charge-off rates and 30-day delinquency rates rose. Executives say the impact of inflation is clear.
“Think about a consumer who makes $50,000 a year,” John Green, Discover’s chief financial officer, said at an investor conference in December. “When inflation outpaces wage growth, they end up making choices in terms of what they spend, what bills they pay, and frankly what they put on the table.”
inflation It peaked at 9.1% in June 2022 and is currently just above 3%. However, the costs of many goods and services are still rising. According to the Bureau of Labor Statistics, the price of a loaf of bread went from $1.54 in December 2020 to $2.02 at the end of last year, and a gallon of gasoline rose from an average of $2.17 to $3.29 during the same period.
Renters are especially feeling the pinch. The median rent for properties with up to two bedrooms jumped from $1,424 at the end of 2020 to $1,713 at the end of last year, according to realtor.com.
VantageScore’s Tavares worries that the recent reintroduction of student loan payments could have a more severe impact on these customers’ ability to repay their debt.
“People are scrambling to pay these obligations that they haven’t had to pay for three years, and it’s hurting the very demographic we’re talking about here: younger people and less affluent people,” Tavares said. Ta.
American Express has also seen an increase in charge-offs and delinquencies over the past year, but not as much as its competitors. Until now, Amex has catered to customers with high credit scores who pay off their cards at the end of each month. But even AmEx customers now carry balances more regularly. AmEx’s net charge-off rate was 2% last quarter, up from 1.2% a year earlier.
In between them are JPMorgan Chase and Bank of America, two giant banks with large customer portfolios. Perhaps because the bank’s customers have a wide range of income levels and credit scores, their credit metrics have only increased slightly. But both banks are setting aside more cash to cover potential loan losses, mainly due to their credit card portfolios.
Bank and interest rate relief that would allow Americans to refinance these high-interest debts is unlikely anytime soon. The Fed gave its first policy hints on Wednesday. Interest rate cuts are likely to be several months away. Additionally, interest rates on credit cards tend to be very high compared to the interest rates charged by the Fed on loans.
Additionally, a report on banking industry sentiment found that banks are becoming more cautious when it comes to lending, which could potentially allow these Americans to refinance their high credit card bills into lower-interest loans. means lower.
Economists currently believe that the economic strain felt by these low-income Americans is unlikely to spread broadly through the economy, at least for now. But economists and experts see the rise in delinquencies as one of the growing risks to the economy this year, especially if student loans become unaffordable for debt-laden young people.
“The rise in delinquencies warrants monitoring, but does not necessarily ring alarm bells,” TD Economics’ McLeod wrote in the report.