In this photo illustration, Visa, Mastercard and American Express logos are seen on various credit cards and debit cards next to US one dollar bills on January 4, 2025 in Somerset, England.
Anna Barclay | Getty Images
According to a report from the Philadelphia Federal Reserve, consumer stress has increased as more credit card holders only pay their bills with minimum amounts.
In fact, the share of active holders currently making basic payments with their cards has risen to a 12-year high, data through the third quarter of 2024 shows.
The level rose to 10.75% during the period, part of an ongoing trend that began in 2021 and has accelerated as average interest rates have skyrocketed and delinquencies have also accelerated. The increase also marked a record high for a data set that began in 2012.
The development of minimum payments was accompanied by an increase in late payment rates.
The percentage of cardholders more than 30 days past due increased from 3.21% to 3.52%, an increase of more than 10%. It is also more than double the crime rate, which was at a pandemic-era low of 1.57% in the second quarter of 2021.
The news contradicts the general narrative of a healthy consumer continuing to spend even as inflation hits a more than 40-year high in mid-2022 and has remained above the Fed's 2 percent target for nearly four years.
Sign of strength
There are certainly still numerous positive signs. Despite the rising crime rate, the pace is still well below the peak of 6.8% during the 2008/2009 financial crisis and does not yet indicate serious stress.
“Much remains unknown. We’ve seen in the last few days how quickly things could change,” said Elizabeth Renter, senior economist at private finance firm NerdWallet. “The underlying expectation is that overall consumers will remain strong across the economy.”
Adjusted for inflation, consumer spending rose 2.9% on an annual basis in November, according to Goldman Sachs, which noted Tuesday that it sees consumers as a “source of strength” in the economy. The firm estimates that consumer spending will slow somewhat in 2025 but will still grow at a good real rate of 2.3% this year, and Goldman expects defaults to show signs of leveling off.
However, if the trend of solid consumer spending continues, it will face some formidable headwinds.
According to the Fed, average credit card interest rates have risen to 21.5%, about 50% higher than three years ago. Investopedia puts the average interest rate even higher at 24.4% and points out that so-called low-cost cards, which are given to borrowers with poor or no credit, are over 30%. Consumers received no help from the Fed: Even when the central bank cut its key interest rate by a full percentage point last year, credit card costs remained high.
According to the Philadelphia Fed, these rates are rising to much higher balances, with revolving credit debt rising to $645 billion, a 52.5% increase since hitting a decade low of $423 billion in the second quarter of 2021 corresponds.
Renter noted that increasing numbers of respondents to the company's consumer survey – currently 48% – said they use credit cards for essential items. Additionally, the NerdWallet survey found an even higher proportion, closer to 22%, who said they only make minimum payments.
With an average credit card balance of $10,563, just paying the minimum would take 22 years and cost $18,000 in interest, according to NerdWallet.
“With higher prices, people will rely more on credit cards to pay for essentials. If you accept higher interest rates, it becomes more difficult to make ends meet,” said Renter. “If they only make the minimum payment, you can very quickly find yourself struggling to make ends meet and drowning.”
The trend in this direction is not encouraging. A recently released New York Fed survey for December found that the average perceived likelihood of missing a minimum debt payment in the next three months was 14.2%, the highest since September 2020.
Home loans slow
It's not just credit cards that are affected by the crisis for households.
Mortgage originations also hit a more than 12-year low in the third quarter, according to the Philadelphia Fed report. After peaking at $219 billion in the third quarter of 2021, lending is down to just $63 billion three years later.
“Faced with high mortgage rates, consumers who have taken out mortgages with low fixed rates have little motivation to refinance, reducing mortgage demand,” the central bank’s report said.
Additionally, the debt-to-income ratio on home loans is also increasing, recently reaching 26%, up 4 percentage points over the last five years.
The typical 30-year mortgage rate has recently risen above 7%, creating another barrier to apartment and home ownership.
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