Households worldwide are leaning on credit cards to meet everyday costs as inflation and elevated interest rates take a toll. In the U.S., credit scores for lower-income cardholders have fallen to their lowest point since the beginning of 2020, indicating that credit delinquency might still get worse.
In the UK, a Bank of England credit conditions survey revealed that both mortgage and credit card delinquency rates increased by the end of 2023. That’s even as borrowing rose in both credit card and non-mortgage lending.
In reference to the UK report, Javelin Strategy and Research Director of Credit Brian Riley said, “Consumers in every market face the dual challenge of rising interest rates and high inflation. Like the U.S., loan demand is strong, but consumers are leaning on credit cards to support their household budgets. They are simply not able to keep pace with rising costs.”
A Global Problem
The Q4 report from the Federal Reserve Bank of Philadelphia echoed many of the concerns raised in the Bank of England survey. Around 3.5% of U.S. credit card balances were over 30 days past due—that’s the highest level of delinquent accounts since 2012, and an uptick from the previous quarter. The amount of accounts that were 60 or 90 days past due rose as well.
The number of borrowers who were simply making minimum payments also soared to its highest mark, increasing 0.34% from the previous quarter. Roughly 10% of cardholders have a balance exceeding $5,200, and 25% of accounts broke $2,000 for the first time.
Relief may be on the way for UK borrowers because the Bank of England projected that inflation is expected to drop below 2% in the coming months. However, it clearly hasn’t made any impact for consumers yet.
Kareem Haji, who oversees UK financial services for KMPG noted: “Defaults across all unsecure lending (not including mortgages) increasing over the same three-month period indicates many people are still struggling to meet their day-to-day costs. Lenders will need to be vigilant and continue to offer support for borrowers in the interim.”
Thinking Downfield
The initial response from lenders was not as supportive as borrowers might like. Credit card issuers in the UK have begun to shorten the interest-free periods for credit card balance transfers.
In the U.S., many card companies have begun to tighten credit limits. The median account had a $3,000 limit in Q4 2023, which continued a yearly decline. In contrast, the average credit limit was $3,368 in Q2 2023.
Riley, who has been forecasting a delinquency wave for years, said, “Credit card issuers need to think downfield into late 2024 and early 2025. These stresses will turn into real operational risk that will result in higher chargeoffs.”