The recent data released by the Federal Reserve in Q3 highlights the credit card delinquency rates across various metrics, suggesting that American consumers are not as financially strained as some may believe. The Federal Reserve reported that the 30-day delinquency rate on credit cards issued by commercial banks is 3.23%, which indicates a marginal decline. In contrast, Equifax noted a 60-day delinquency rate of 3.01%, while Fitch reported an even more favorable rate of 0.99% for prime-rated credit cards packaged into Asset Backed Securities. These figures collectively imply that while delinquency rates have risen post-pandemic, particularly among subprime borrowers, prime-rated cards remain in strong standing.
The increase in delinquency rates following an initial drop during the pandemic can be attributed to the end of the free-money era, where stimulus payments and forbearances led to a temporary suppression of financial distress. As people utilized government assistance to pay off debts or reduce credit use, delinquency rates saw a historic low in Q2 2021. However, this was not sustainable, leading to a resurgence of delinquencies, predominantly driven by subprime borrowers. The term ‘subprime’ reflects not just a lack of income but an individual’s poor credit history, as evidenced by various examples, including high-income earners who may still fall into this category due to financial mismanagement.
Fitch Ratings provides further insights into this divide between prime and subprime. The consistent 0.99% delinquency rate observed in September for prime-rated credit cards underscores the satisfactory financial health of a significant segment of cardholders. However, the pressing issue remains within the subprime sector, where delinquencies are more pronounced. The New York Fed’s metric of ‘Transition into Delinquency’, which measures the inflow of balances into delinquency in a year without netting out the outflows, reported an encouraging decline, though it still stirred confusion among financial media by being mischaracterized as a traditional delinquency rate.
Furthermore, it is essential to clarify the relationship between credit card balances and borrowing. While an increase in credit card balances—up by $24 billion in Q3—suggests greater consumer spending, this rise does not directly correlate to increased debt levels. Many consumers pay off their full balances monthly, enjoying rewards without incurring interest charges. This trend indicates credit cards’ significance as a primary payment method in the U.S., reflecting a diverse array of spending activities rather than being a strict measure of indebtedness. With inflation and rising costs contributing to recent upticks in balances, the underlying consumer behavior suggests a continuation of routine financial habits.
Notably, over the past two decades, disposable income has risen substantially, outpacing increases in credit card and other consumer loan balances. This long-term trend has reduced the debt-to-disposable-income ratio significantly from 14% in 2003 to 7.9% currently. This widespread improvement presents a more optimistic view of consumers’ ability to manage debt, contrasting with panic narratives that often arise during economic fluctuations. With the recognition that disposable income encompasses diverse sources beyond wages, including government transfers, the overarching picture points toward a reasonably stable financial environment for many Americans.
Moreover, banks’ eagerness to expand credit lines reveals another layer to the current consumer credit landscape. A year-over-year increase in aggregate credit limits, alongside significant growth in unused credit, indicates that lenders remain optimistic about consumer repayment capabilities. The simultaneous rise in credit card balances signifies active consumer engagement with credit products, hinting at a broader recovery in economic sentiment. As banks push to grow their portfolios, they contribute positively to the accessibility of credit, albeit with careful monitoring of resulting delinquency trends among various borrower segments to maintain overall financial stability.