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

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

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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.

Debts that have moved into “severe delinquency,” or are 90 days or more past due, increased in several categories over the year, but no more than credit cards.

With total debt at $1.13 trillion, credit card debt that fell into serious delinquency was 6.4% in the fourth quarter, up 59% from just over 4% at the end of 2022, the New York Fed reported. The quarterly increase was about 8.5% on an annual basis, according to researchers at the New York Fed.

Defaults also increased in mortgages, car loans and the “other” category. Student loan defaults fell, as did the number of 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.

“The transition from credit card and auto loans to crime is still above pre-pandemic levels,” said Wilbert van der Klaauw, economic research adviser at the New York Fed. “This suggests increased financial stress, particularly among younger and lower-income households.”

As defaults rise, New York Fed researchers expect total debt to rise at about the same pace as 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% year-over-year. However, credit card debt increased by 14.5% compared to the same period in 2022. Auto debt rose to $1.61 trillion, up $12 billion on a quarterly basis and $55 billion annually, or 3.5%.

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

Since the central bank began tightening, the typical interest rate on credit cards has risen from about 14.5% to 21.5%, according to Fed data. Credit card debt as a share of income is still below pre-pandemic levels.

Fed researchers said rising interest rates likely played a role in crime rates. In the case of cars, for example, payments have hardly changed due to the increased tariff structure despite lower prices.

Student loan debt, an area of ​​interest to lawmakers in Washington, has barely increased during the pandemic and currently stands at just over $1.6 trillion. That was barely a change from the third quarter and was just 0.4% more than a year ago. President Joe Biden has canceled about $136.6 billion in student loan debt since taking office. The share of debt in serious crime fell slightly to 0.8%.

Mortgage debt rose 2.8% in 2023, while the delinquency rate rose to 0.82%, up a quarter of a percentage point from the previous year.

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2024-02-06 17:08:29