New delinquencies rising for credit card users, New York Fed finds
While relatively low, Fed sees increase as 'potentially concerning' sign of financial strain
Expert on consumer credit laws and regulations
Credit card users are showing increasing signs of financial strain, a new report from the Federal Reserve Bank of New York says.
The Household Debt and Credit Report said that delinquencies on credit card accounts accelerated in the second quarter.
New “serious” delinquencies of 90 days late or more rose to 4.42 percent of card balances, from 4.07 percent in the first quarter and 3.51 percent a year ago. New early stage delinquencies of 30 days or less also climbed.
“While relatively low, credit card delinquency flows climbed notably over the past year,” New York Fed Senior Vice President Andrew Haughwout said in a news release. The delinquency flows look at newly delinquent accounts in the quarter, which were previously in good standing.
Most of the increase in delinquencies came from accounts with subprime credit scores. Looking at serious delinquencies as an annual average, newly delinquent accounts for card users with scores below 620 exceeded 20 percent of balances in 2016, according to a blog post published by Haughwout and other Fed economists.
The quarterly report examines credit report data to see trends in consumers’ debt levels and includes mortgages, autos and student loans as well as credit cards. The total household debt load grew 0.9 percent in the quarter, with card balances up 2.6 percent.
More credit cards in market
Other findings from the report include:
- The number of credit card accounts grew to 459 million in the quarter, up from 455 million. In the second quarter of 2016, the number of accounts was 441 million.
- While accounts have become available for subprime consumers, card issuers have protected themselves by keeping borrowing limits low. In 2016, the median limit on new cards for borrowers with scores under 620 was just $750, the Fed economists wrote in their blog post. That compared with median limits of $8,500 for “super prime” accounts with scores over 760.
- The overall serious delinquency rate for credit cards was 7.38 percent of dollar balances, counting both newly delinquent accounts and existing ones. By comparison, the overall delinquency rate for student loans was 11.2 percent; auto loans, 3.92 percent; and mortgages, 1.47 percent. The student loan delinquency rate understates problems in that market because many student loans are in deferment, the Fed economists said, meaning they are not being paid, but still qualify as being up-to-date.
‘Potentially concerning’ signs
The increasing delinquencies could be an early sign of future trends, and bear watching, Haughwout said. The acceleration of late payments follows an opening of the card market to more subprime users, who accounted for most of the rise in delinquencies, the Fed report said. New accounts issued to subprime users with credit scores below 660 were flat in 2016, after increasing the previous two years.
However, the sign of financial strain on card users also comes during a period of economic strength and low interest rates, making it “potentially concerning,” Haughwout and other Fed economists wrote in the blog post.
The second quarter's increase in delinquencies was the first sustained deterioration since the 2009 recession, Fed economists said. But that doesn't mean history is about to repeat itself. Credit Suisse industry analyst Moshe Orenbuch said in a July 31 research report that delinquencies should moderate in 2018, with losses so far being an expected part of the market's comeback.
Card balances only recently recovered their pre-recession levels, reaching a new peak of $1.021 trillion in June, according to the Federal Reserve's consumer credit report. The dollar total, however, doesn't take into account the growth in the economy since 2008, the last time balances were as high.
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