The rise in credit card delinquencies experienced in 2023 could extend into this year, with a particular threat to smaller banks. According to a new report from the New York Fed, delinquencies surged by more than 50% last year, and total consumer debt grew to $17.5 trillion.
With a total of $1.13 trillion in debt, credit card debt that moved into serious delinquency amounted to 6.6% in Q4 2023, while it had been around 4% at the end of 2022. “Serious delinquency” is defined as 90 or more days past due. That means for every $100 currently outstanding on a credit card bill, $6.60 is more than 90 days in default. According to research from TransUnion, serious delinquencies have reached their highest level since 2009, in the midst of the Great Recession.
Overall, credit card debt increased by 14.5% from the same period in 2022. Meanwhile, household debt rose by a more modest 3.6% from a year ago.
Another item of concern is the deterioration in auto loans, where serious delinquencies rose from 2.22% to 2.66% over that same time frame. When autos approach the 90-day delinquency level, lenders begin to repossess vehicles. This can set the household budget into a funk, as the consumer will face transportation issues that may threaten their jobs.
The Threat to Smaller Institutions
Why have we seen such steep increases? For one thing, credit card users have been the victim of higher interest rates. Between March 2022 and July 2023, the Federal Reserve raised its short-term borrowing rate by 5.25 percentage points. Since the Fed bank began that tightening, the typical rate on credit cards went from about 14.5% to 21.5%, according to Fed data.
Brian Riley, Director of Credit Payments & Co-Head of Payments for Javelin Strategy & Research, warns that there are several headwinds facing credit card issuers right now. “Although there are indications that interest rates will not go higher and perhaps begin to fall, they will not fall as quickly as they rose,” said Riley. “This means that creditors will have to face continued stress for months to come.”
But it’s the smaller institutions that need to be extremely careful.
“In 2023, we saw top issuers charging off 3.36% to bad debt in credit cards,” Riley said. “Smaller issuers were more than twice that, at 8.5%. Top issuers passed their Dodd-Frank Stress tests, but smaller banks are not subject to this rigor. Overall, we say watch for an increase in delinquency as 2024 progresses and particularly keep an eye on smaller financial institutions as they weather the storm.”